Have your cake and eat it
Article Date: Jun 20 2006
Sell, lease and watch it grow
When successful businesses get to a certain size, no amount of clever efficiency gains or cash flow financing options are likely to deliver the funds needed to take you to the next level in sufficient time to exploit whatever business advantage you have. This is often because quantum leaps in size and scale require a commensurate financial injection.
Charles Whelan, managing partner at HW Corporate Finance, advises owners to take a long hard look at their business assets and where they sit within the overall commercial strategy.
‘If you’ve reached a certain stage and you and your backers don’t want significant equity dilution, you need to sit down and think, “What can I best get out of this business?” If you are a widget-maker, you might take a considered view on whether you should actually own anything that is not about making widgets. In this context, sale and leaseback of assets is great for freeing up cash for growth.’
Selling property to maximise firepower and fuel growth is perhaps the best-known sale and leaseback technique, popularised in the past by high street retailing giants. As well as slashing your property management costs, it drives efficiencies by helping you to focus on your core business.
One venture to use this technique to considerable effect recently has been garden centres play Blooms Of Bressingham. It recently completed the sale and leaseback of its 26-acre freehold at Bicester with Blooms Properties Limited Partnership (BPLP), a 50:50 joint venture with LaSalle Investment Management, for £10.9 million. The joint venture will now provide Blooms with the finance to make acquisitions of rival businesses, with Blooms granting BPLP the first refusal on any property that is subsequently sold at the newly acquired sites.
Since announcing the sale and leaseback, Blooms has bought the business and assets of the Worcester Garden Centre and Stevenage Garden Centre, taking total portfolio garden centres to ten in moves that will boost the heated covered space from which it trades by more than 60 per cent over the next two years.
Selling it off, growing fast
Pure property and non-core business disposal have greatly strengthened the growth prospects of acquisitive £183 million global distribution venture Diploma, which operates in the life sciences, seals and controls sectors. By taking this cash-raising route, its shareholders have, like those at Blooms, been able to avoid serious equity dilution.
‘Over the years, we have funded our growth through cash flow from different sources,’ recounts chief executive Bruce Thompson. ‘Firstly, operating cash flow, because once you get scale in distribution you become a positive cash generator. Secondly, we have been fortunate in that we had land from legacy business that was surplus to requirements, and we have generated about £18 million over three or four years from the sale of three phases of land at Stamford for residential development.
‘Thirdly, going back a few years,’ he continues, ‘we went through a major restructuring and sold off a number of non-core businesses in areas like building products and specialist steels for £90 million, though we actually returned £70 million of that cash to shareholders.
‘So on the one hand, we generated cash ourselves, and have used that to make acquisitions, but we have also been in the position to make acquisitions through cash (no dilution), and in my view, that certainly strengthens your hand when it comes to negotiations.’
Diploma’s recent half-year figures to March were excellent, with Thompson announcing a 20 per cent rise in profits to £9.7 million on sales up 17 per cent to £63.5 million. Profits after the sale of that third phase of land rocketed higher from £8.3 million to £20.3 million, and Diploma closed out the financial reporting period with a fat £30.3 million cash pile that will help the business expand further.
