City Link shows the risk in turnarounds
First published in the Financial Times on 6th January 2015.
The company’s problems were probably irreversible but now it must treat its staff decently
Turnrounds can be a messy and difficult business, as thousands of unfortunate City Link staff discovered over Christmas. While the RMT union and various commentators have expressed shock and disgust at the failure of the UK delivery company, no seasoned observer should be surprised — City Link had made losses for at least five years before going into administration. Unlike the state, the private sector rarely subsidises such deficits for ever.
I know from personal experience how hard the parcel delivery trade can be. Some years ago, I backed two players in the sector — Nightfreight and United Carriers — both of which were troubled companies when I invested. I learnt first-hand that it was a sector plagued by overcapacity, high fixed costs, slim margins and mediocre returns. We managed to sell both companies for a profit, although the French owners of United Carriers subsequently closed the company. I felt I’d had a lucky escape.
Hence I followed with interest the acquisition of City Link by Jon Moulton’s Better Capital business. I’ve known Mr Moulton for some years, and consider him an interesting character study. He is successful, outspoken, and incredibly gloomy. He gives the most relentlessly pessimistic speeches I’ve ever heard, and is frequently quoted in the media as a doomsayer.
This is a curious philosophy for someone engaged in rescuing companies, because more than anything you need a sense of hope to pull off recoveries.
I have done a few turnrounds over the years, and had both winners and losers. It is a high risk activity, and not for the faint hearted. I do know that fixing lossmakers is intensive work that needs real hands-on attention — which is why I am surprised Mr Moulton supervises his empire from distant Guernsey. Not terribly handy for the City Link HQ in Coventry.
But he is very experienced, and has plenty of his own cash at stake in his investment vehicle Better Capital, so I assume he knows what he is doing. However, I don’t fancy his chances with either Fairline Boats or Jaeger, the clothing brand, both struggling companies in his portfolio.
Mr Moulton has taken something of a battering in the media since City Link’s demise, partly because it was disclosed on Christmas Day. But he is a robust and public critic of others, and a very rich man, so I am sure he knows the rules of the game.
In my opinion, Better Capital would be unwise to seek repayment of its secured loans and interest from City Link until staff and partners have been decently treated. Mr Moulton might be within his legal rights to press for the entire £20m expected liquidation proceeds, but I suspect his reputation will suffer further damage if he does so.
Of course, he might well argue that he owes his principal duty of care to the shareholders of Better Capital’s funds — and anyway, the administrator will decide the ranking of dividend payments. But I am confident Mr Moulton could find a way to compensate those who have lost their livelihoods, at least to a degree.
If by his behaviour he demonises private equity, he does the industry that has made him wealthy a great disservice: in November he wrote that the “outcome is a matter of professional pride” for his investments. Moreover, I suspect sellers of distressed companies will be more reluctant to treat with Better Capital in the future.
It is curious City Link went broke now. Home delivery from online shopping has expanded the market hugely, demand and supply ought to have come into better balance, and the falling price of fuel should be reducing costs materially. I suspect the problems of City Link were endemic and irreversible, which is why Rentokil sold the undertaking for a nominal £1, and in a sense Better Capital were brave for at least trying.
If no one attempted turnrounds, more companies would shut. At heart capitalism is all about creative destruction — inefficient enterprises shutting down, and the assets being reallocated towards more efficient uses — leading to a more prosperous society overall. Of course the human cost can be high, and the collateral pain from such dislocation considerable. I wonder what John Caudwell — the telecoms billionaire and Better Capital’s latest fund’s largest shareholder — thinks Mr Moulton should do?