Published on June 14th, 2014 | by The GC Team1
How to make money out of electricals…
The recent findings by a Leeds employment tribunal – that 275 ex-Comet employees made redundant when Comet went into administration were unfairly treated and are now entitled to full compensation – will have come as no surprise to anyone who has been keeping an eye on the fallout from Comet’s crash. It’s also good news for the other 6,889 ex-Comet staff who may also be entitled to compensation, (though slightly less good news for UK taxpayers who will have to foot the compensation bill via the Insolvency Service).
But perhaps even more importantly, what has emerged about the history of Comet’s disappearance from the electrical retail scene in the UK is a textbook example of how to turn a handsome profit from a retail operation in difficult trading conditions.
Apparently, the key to success is to have no interest whatsoever in trading as a retailer at all, and to avoid getting bogged down in all that tedious detail about creating attractive retail environments, devising a strong offering with great value products, providing well trained staff and excellent customer service…..
In fact, caring about retailing is a real disadvantage. It could get in the way of the single-minded focus on acquiring a business at the right price, attaching the right strings, then coldly calculating exactly the right time to go into administration to maximize the value of return on investment, even when that may mean leaving customers and suppliers high and dry, and thousands of employees without a job or any compensation.
We have done a little research into the Comet story, augmented by information from The Needle Partnership LLP, which represented 275 ex-Comet employees at the tribunal. You can judge for yourself whether the private equity smart guys have proved beyond doubt that trying to run a retail business is a mug’s game:
- In February 2012 Comet was sold by Kesa Electrical to a consortium of venture capital funds associated with private equity firm OpCapita. The sum paid for Comet’s entire retail operation was reported to be £1, and Kesa also provided a “dowry” of £50 million to the purchasers. It came out at the tribunal that, under the financial arrangements put in place for Comet by OpCapita LLP, Comet was supplied with working capital through a secured loan from one of its owners, Hailey Acquisitions Limited (HAL).
- In spite of a “major turnaround plan” and improved trading performance from Comet, “by August 2012, HAL had begun actively exploring administration and closures as a way of extracting money out of Comet, and appointed a firm of retail consultants to draw up a plan to close Comet’s stores, looking at when rent payments were due and when would be best financially to stop trading. Trial closures were carried out in Edinburgh and East Kilbride in September and October 2012.”
- “The plan formulated for HAL to maximise the return on its investment required the stores to be closed and stock sold in the run up to Christmas, as this was the optimum timing to sell stock and tied in well with rent payment dates.”
- HAL withdrew working capital from Comet and demanded the return of capital already advanced. “The Tribunal found this was because Hailey Acquisitions knew this would push Comet into administration and they could then put into place the well formed plan to close the stores and make all the staff redundant. This information was not shared with the employees.”
- Employees were told that the administrators were working towards a sale of the Company or sales of some of its stores. However, evidence was given at the Tribunal that this was extremely unlikely. “Deloitte LLP had already been instructed to try and sell the business before the administration and there had been no serious interest. Any buyer would have had to repay HAL some £50 or £60 million. The only viable option from the moment that HAL withdrew the working capital was a closure of all stores and establishments and mass redundancies – yet this information was not shared with staff.”
- The Tribunal noted that Deloitte LLP, the administrators of Comet, had on Monday 5 November signed and submitted an official HR1 form to the Secretary of State confirming that no redundancies were proposed. “This is surprising given the factual background which emerged during the Tribunal case, and the Judge described this as ‘positively misleading information’ and noted that there is potential criminal liability for a failure to notify the Secretary of State of proposed redundancies.”
Victoria Robertson, Employment partner of The Needle Partnership LLP, commented:“Comet’s demise is one of the biggest High Street casualties of recent years. A corporate raid by private equity investors resulted in a 75 year old British company being destroyed and nearly 7,000 jobs being lost. During the Tribunal case it emerged that [employees] had been lied to, misinformed, and treated with very little dignity or respect whilst Comet’s owners extracted the maximum value from the business.”
Incidentally, just to rub salt into these painful wounds, Deloitte LLP, the administrators, filed a report in October 2013 showing that they had been paid £5 million in fees. The same report details that the retail consultants involved in store management and closures had been paid £7.2 million. Meanwhile Comet and its owners escaped any liability for paying redundancy pay and notice pay but employees were left to claim the minimum statutory amounts from the Insolvency Service (i.e. the tax payer). The Insolvency Service will also pay the protective awards.
So, no messy involvement in the arts and skills of electrical retailing, and everyone’s a winner. Except, maybe, Comet customers. And of course suppliers. And don’t forget the employees. And consumers whose choice has been reduced. And the reputation and wellbeing of electrical retailing in the UK. And our depleted High Streets. And the taxpayers such as you and me who will be paying for the employee compensation. Apart from that, everyone’s a winner. Or, more accurately, the investment capital consortia with no apparent interest in our business except as a collection of assets ripe for exploitation, are winners. So that’s all right, then.