Page 5: Buy-out
3i's approach can be illustrated by looking at two case studies. The first of these is the management buy-out (MBO) of Denby Pottery. Wedgwood, Royal Doulton and Denby are internationally famous for traditional English china and pottery. All three were established around two centuries ago, yet all have seen dramatic changes of ownership in the 1980s and 1990s.
At Denby, the change process began in 1987 when the company was taken over by Coloroll plc. This fast growing, ambitious company allowed local Denby management to continue to run the business and was keen to provide capital for investment. However the onset of recession in 1989 dragged Coloroll down, leaving Denby’s fate in the hands of the receiver. A receiver is usually an accountant, appointed by a bank, whose task is to raise the maximum amount from the sale of assets, in order to repay creditors. The directors therefore knew that their business would soon be sold off. For those involved with the well being of Denby, including its suppliers, customers, employees, directors and managers, this was a very worrying period.
The directors and other managers of the company had a clear understanding of the strengths of their business. They were determined to make a go of it and therefore created clear and well thought out plans for a management buy-out. At the time there were several other organisations who were keen to take over Denby, so the competition was intense. The management team recognised that they could not go it alone - they needed help from people with the right sort of financial backing and an astute understanding of business. The weeks following the collapse of Coloroll were considerably anxious. The directors had to work around the clock to put together a convincing offer and business plan to present to the receiver.
The Denby MBO team turned to 3i for help. 3i was able to assist with the buyout process, provide suitable financial backing and was enthusiastic about the new enterprise. The buy-out process involved a considerable amount of hard work; from communicating with employees and customers, to establishing separate accounting systems, creating a new corporate identity and capitalising upon any available media interest. Fortunately, on 24th July 1990, the MBO team’s bid of £5.3 million won the receiver’s approval. 3i's Nottingham office, working with the managers, provided the finance necessary to purchase the company. In reaching their decision, the local office was assisted by the knowledge of 3i’s team of industrial advisers, who were able to give detailed information on Denby’s market and potential. Crucially, 3i was impressed by Denby’s management, both as individuals and as a team which understood its market and had a successful track record of product development.
Since the buy-out, the introduction of new designs has accelerated and the company has increased its sales in the USA and France to complement its strength in the UK. As well as 3i’s initial £6.7 million investment, a number of additional loans have been made to finance new equipment, helping growth in profits and sales. In June 1994, Denby Pottery floated on The London Stock Exchange with a market capitalisation of £40 million.
This case provides an excellent example of what 3i can do. In effect, 3i served as both a lifeline and a bridge to Denby. At the time of the receivership 3i served as a lifeline providing the means whereby an excellent management team were able to save their organisation and preserve its independence against outside bidders. The finance and expertise given by 3i then provided a bridging period in which Denby could restructure and build on its strengths, before moving onto a position where it could gain new sources of funds through a listing on the Stock Exchange.