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Philip Green and his leveraged buyout of BHS

Former Carlyle director Sebastien Canderle recently published his latest book, The Good, the Bad and the Ugly of Private Equity. The following excerpt introduces the moment when BHS’s mountain of liabilities toppled the business.

Philip Green, who had turned down an £800m ($1.03bn) offer by BHS’s chief exec Terry Green back in 2001 – asserting at the time that the business was worth more than £1bn – as well as a £700m bid by the company’s chairman Allan Leighton six years later, sold it to Dominic Chappell for just £1, in one of the most unorthodox deals ever witnessed. The catch of such a low valuation – for there is a catch – is that the business was carrying hundreds of millions of pounds in liabilities sitting on and off the balance sheet.

For Chappell and his posse of city professionals, taking on the task of restructuring BHS was a huge gamble – one that would have required the well-honed skills of turnaround specialists, deep retail expertise and oodles of nous. The team leading Retail Acquisitions had none of those.

Consequently, they never stood a chance to make it work. Judiciously, not many of Green’s team members decided to hang around after the disposal.

As soon as BHS was sold, both its finance director and CEO departed. The day after their purchase, the new owners were desperately looking for a chairman to run the loss-making 171-store chain. The upshot of it all was that on 24 April 2016, a year after Green’s exit, BHS was put into administration, the UK equivalent of Chapter 11.

Philip Green was apparently one of the lenders to BHS who had vetoed a crucial £60m refinancing. He would not relax the terms of a charge he held over the assets, meaning the retail chain was unable to secure a lifeline from specialist lender Gordon Brothers.

The process threatened to throw many of the group’s 11,000 employees out of work and leave many suppliers out of pocket – the amount of unsecured creditors stood at £1.3bn, including pension liabilities and rent charges on loss-making stores.

It was the biggest retail bankruptcy since that of Woolworths in December 2008. BHS’s original rival had gone belly up eight years earlier due to a combination of factors, ranging from the obsolescence of its variety store concept, fierce competition from supermarkets and internet alternatives, consumer recession, as well as the clichéd corporate ailment of our times: inordinate debt levels rendered unmanageable by the financial crisis.

Perhaps the massive loss of value at BHS confirmed what many of his critics had stated for years; that the ‘miracle’ Green had worked at the store chain owed a lot to financial trickery and less to retailing genius.

Fashion being the cyclical and fickle industry that it is, only people who sell at the top of the cycle can hope to keep their reputation intact. About the only subterfuge in his arsenal of wheeler-dealer that Green had not applied was to strip and flip the business the way he had offloaded Olympus and other Sears brands in the 1990s.

After buying the company off Storehouse for £200m in 2000 and building it into a business worth four to five times that amount in less than two years, he had been too greedy by refusing to exit. Instead, he witnessed the group’s value crash back down to earth.

The turnaround miracle of the early noughties had failed to translate into a meaningful and enduring competitive advantage. In fashion, nothing lasts forever. There was also the small matter of the pensions of 20,000 current and former employees. BHS’s pension deficit had gone from approximately £70m in April 2006 to twice that amount in late August 2014.

Although it was assessed at £200m at the time of the company’s disposal to Retail Acquisitions, after careful consideration a year later it was estimated to be closer to £500m.

Suddenly, it seemed clearer to outsiders why Green had been so eager to flog the chain into the arms of any buyer, even one as unsuitable as twice-bankrupt Dominic Chappell.

A month before BHS was put into administration, the Pensions Regulator and the Pension Protection Fund revealed that they were putting pressure on Sir Philip to fill the hole in BHS’s pension scheme.

At the time, Green’s suggested additional contribution was reported to be £80m, comprising £40m of cash and £40m in loans. But negotiations with the regulatory authorities were only just starting.

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