Liam Dann 's Opinion

Business editor of the NZ Herald

Liam Dann: The latest victim of private equity boom and crash

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Private equity company PEP (REDGroup's owners) bought Australian and New Zealand bookselling businesses including Angus & Robertson and Whitcoulls for $136 million in 2004. Photo / Greg Bowker
Private equity company PEP (REDGroup's owners) bought Australian and New Zealand bookselling businesses including Angus & Robertson and Whitcoulls for $136 million in 2004. Photo / Greg Bowker

All this talk about book-buying trends is interesting but in the end it is debt that has undone Whitcoulls and its parent company REDgroup.

The historic local brand is just another victim in the now familiar tale of the private equity boom and credit crunch crash.

All retailers are having a tough time and bookselling is one of the toughest sectors to be in during a recession. Books are discretionary. Bookselling also faces some of the most aggressive competition from online retailers. Despite being a less pleasurable experience, buying books online is convenient and often cheaper than browsing a book shop.

No doubt these factors were putting the squeeze on sales at Whitcoulls and Borders.

But they would not have been enough to derail them if they had a manageable debt position.

Clearly they - or their parent REDgroup - did not and major creditors were not prepared to cut them the kind of slack needed to trade on as normal.

The Whitcoulls story is not dissimilar to that of Yellow Pages and TV3 owner MediaWorks.

All three were purchased by private investment companies during the economic boom years of the last decade. All over the world between 2001 and 2008 profits were good and valuations climbed year on year as a matter of course.

Banks were relaxed about lending and it became the norm for private equity deals to be funded with high debt levels.

The model typically involved owning a business for about five years - enough time for a quick restructuring to boost earnings - then flicking it on for a big profit.

But when the financial world melted down in 2008 sales dried up and valuations fell sharply. That left companies owning assets worth less than their debts.

That alone was enough to spook the bankers that lent the money. But things went from bad to worse for many of these companies as earnings fell below levels that could not even cover the interest on the debts.

We do not have up-to-date numbers on REDGroup's debt position relative to the value of its assets but what we do have does not look good.

Private equity company PEP (REDGroup's owners) bought Australian and New Zealand bookselling businesses including Angus & Robertson and Whitcoulls for $136 million in 2004.

In 2007 they were reported to have paid another $137 million for the Australian and New Zealand businesses of Borders Group.

RedGroup New Zealand's latest accounts (published this time last year - a fresh set must have been about due) showed debts of $131 million.

Having paid about $270 million for the entire Australasian group, at the peak of the boom, it is highly likely the current value of New Zealand operations is well below its debt level.

So even if management was running things pretty well, in this kind of market there was little hope of making enough money to placate the creditors.

There is only so long any banker will tolerate a fiscal position like that which RedGroup was in.

Eventually the banks have to cut their losses.

Luckily for MediaWorks and Yellow Pages, when things came to the crunch their creditors agreed to write off debt and give them a second chance without handing them over to the insolvency specialists.

Whitcoulls has not been so lucky. Voluntary administration looks like a short-term solution. Ultimately there is going to have to be a sell off.

Here's hoping the strength of the Whitcoulls brand will be strong enough and - freed of its debt mountain - valuable enough to ensure it lives on under new ownership.

- NZ Herald

Liam Dann

Business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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