A story of M, a failed retailer.
No, this is not about Mcdonald’s but Maplin Electronics Ltd, a once engaging and highly profitable business that hit a brick wall in 2018. Much has been written about its core strengths and weaknesses. Wickipedia history provides a reasonable narrative of its story of life, minus however much of the nitty gritty stuff on performance and debt and the cycle of business sale, investment and resale. It is indeed this cycle that precipitated its collapse.
Statistics show that a large percentage of failed Retail businesses were backed by Private Equity of Venture Capital and the Technology Industry is no exception. Quite simply, with outrageous valuations and prices paid comes the saddling of huge business debt at often punitive interest rate which pretty quickly or immediately wipes out profit generation. Maplin Electronics is a classic case.
It was in the early part of the 1997 when I was approached by Sales to see what I could do in terms of increasing open credit terms offered to Maplin. We at that time had possibly one of the best Retail salesmen I’ve ever come across; he not only got right up close to the client but worked extremely hard with vendors in terms of support and had a terrific sense of responsibility in fully understanding credit risk. He had worked closely with me on many earlier occasions with different clients and in those days, sales remuneration was commission based with claw-back on slow payment or total default.
Credit Insurance, even in those days was sparse and restricted, the result of a balance sheet already bearing the weight of an initial investment by Brown Shipley Development Capital in 1990 when turnover was around 12m and gross profit was 3.2m. The investment came in to fund growth and expansion, relocating a distribution centre.
It was in 1997 that I first visited, my aim being to find out all that I could about the business and its performance. From a gross profit perspective, Maplin was an incredibly profitable business, a result perhaps of its broad appeal to a mix of different clients and its range of products, sourced and supplied via separate operations in the Far East. It did have the right attitude in terms of store locations, small but well manned and stocked retail premises in small towns and selective local borough shopping centres. The downside from a credit risk perspective was that given Maplin were a cash business, rarely offering credit to its own clients, it did not make sense to extend high value credit when interest levels paid and debt were eating away at profit generation. Banking covenants were in place at the time, one of which demanded that gross profit should remain above 50%.
Controls were excellent however, costs and stock holding were being managed, banking covenants were being met and above all else, growth was clearly evident with new store locations.
In 1999, Compart Plc made an offer and acquired the shares of Saltire Plc, the then holding company of Maplin Electronics. At this time, sales had increased to 45m with gross profit of 23m. Some 60% of revenue was delivered through its store locations. It was at this point that Maplin Electronics (Holdings) Ltd came to being.
In 2001, Graphite Capital led a 41m Management Buyout .The consolidated balance sheet was subsequently hit with intangible assets of 27.6m and long term loans of 39m and by 2003, sales reached 99m with gross profit of 50m, and operating profit of 15m, stores accounting for over 80% of sales. In that year too, some 5m of equity dividends were paid along with 13m of preference dividends.
In 2004, Graphite sold 67% of the business to Montague Private Equity for the quite stunning sum of 244m generating a return multiple of 9.5 times cost and IRR over 120%. Montague paid in excess of 16 times earnings, a quit astonishing valuation. Graphite therefore, did exceptionally well, a quick in and out in three years with a nice wedge of money but the rot for Maplin began thereafter with cripplingly unsustainable debt and accrued interest.
Year end 2005 saw sales of 120m, gross profit of 58m and given Montague’s investment, a balance sheet now saddled with intangible assets of 235m and debt including bank loans, subordinated bank loans and accrued interest on shareholder loan notes of 262m. This quite frankly scared suppliers trading on open credit witless and insurers began to limit or reduce cover granted once more. I opted to offer early settlement discounts in order to keep exposure to manageable levels with a weekly cycle of payment.
While revenue increased each year, the growing burden of interest payment, especially those accruing and not payable till exit began to take a heavy toll with increasing operating losses recorded.
Those who argue accrued interest on loan notes is only payable on exit fundamentally fail to see the damage done to business competitiveness, profitability and its effect, where exit does not arise over the expected period. This type of thing cripples business credit ratings, insurance cover and the provision of credit, all of which lead to certain failure.
Something had to give; the business could not sustain this level of debt and increasing losses decimating the balance sheet. Expansion of stores over time brought with it increased cost and certainly not all stores operated successfully.
Indeed, in the late nineties it had moved to opening some large out of town stores, quite out of sync with its traditional retail space. I noted a large store on the Bath Road in Reading in 2001. I visited it twice in a six month spell and found it generally lacking in footfall and far too clinical.
Given a need to retain gross profit above 50% and stay the right side of banking covenants, it began in later years to be less competitive in both price and availability of product. Its online sales suffered even more. It was in essence in a downward spiral or death spin and what happened in the extended 15 month year to March 2014 was temporary relief, a heavy dose of morphine to lessen the pain and window dress the business to attract a buyer. The business was forced to address the parlous nature of the balance sheet.
2014 Results showed the following-
Sales 269m
Gross Profit 135m
Operating Loss 86m
Interest Payments 92m
Loss for the year 181m
Intangible Assets 40m
Shareholder Loan Notes 137m
Accrued Interest on Shareholder Loan Notes 10m
A large chunk of the loss in this year was a write down in impairment of goodwill (intangibles) of 85m.
Some 442.3m of accrued interest on shareholder loan notes at 16.5% compound, were capitalised through the issuance of ‘C’ preference shares.
The consolidated balance sheet still however reflected a carry forward loss position of 500m. Interestingly too, adjusted EBITDA fell by more than 50% in the last three years of Montague’s tenure.
The sale to Rutland Partners LLP was perhaps a last throw of the dice to limit the damage given the price paid for the business, loan restructure and amortisation of goodwill.
The deal was financed through loan notes of 72.2m and intra group funding of 16.8m. The total enterprise value of the business was 89m. After settlement of debt, the consideration paid was just 14.7m.
In its first year results however, despite a bullish CEO statement, the cycle began to be repeated. Interest accruing on the 72.2m of acquired loan note debt began to take its toll once again as did a rising headcount and excessive increased cost.
Under Rutland’s ownership, the following results were achieved:-
What we see are losses in each successive year, considerable increase in cost and a repetition, albeit on a smaller scale, of debt and accrued interest shattering minimal operating profit: in just three years, the business racked up losses of 33m.
Maplin could and should have done better with online sales which at their peak in 2017 were still only 15% of total sales but the onerous debt position and covenant demands eroded its earlier competitive enough edge. Maplin, in its final years, was far too expensive to go to for product, had lost its mojo in terms of customer service and product range, faced rising costs and suffocated under punitive debt and interest.
It’s quite something that a retail business with extremely high gross margins, successful in early years and knew exactly where its strengths lay, should succumb in such an ignoble way. Much has been written about its early success, why this was and what went wrong but the fact remains, where there is repeat Private Equity or Venture Capital interest, or when ridiculous valuations are met, ignominious failure is so often the result, especially in Retail, where the likes of Toy’s r Us’ is another classic example.
It’s not just Retail however, so many buy and build strategies, repeat MBO’s and successive Private Equity or Venture Capital investments continue to saddle businesses with unsustainable debt levels.
