The dust from investor Baugur’s collapse has settled and the impact of its fall from grace on the high street can now be assessed
A year ago today, one of the most high-profile and daring retail investor’s reign over the UK high street came to an end.
The collapse of the once-feted Icelandic investment firm Baugur - which raided UK shores for fashion and retail assets throughout the previous decade - triggered a chain of events that it was feared would threaten the future of some of the country’s best-known high street chains.
In the days that followed Baugur’s collapse - after restructuring talks with nationalised Icelandic bank Landsbanki broke down following the Icelandic banking collapse at the end of 2008 - the management of retailers including House of Fraser, Mosaic Fashions (the then-owner of chains including Oasis, Warehouse, Karen Millen and Coast), Jane Norman and Whistles issued a flurry of statements distancing themselves from the shareholder and its woes.
In the ensuing media maelstrom, the businesses were dogged by speculation that they too would hit the buffers while private equity businesses and entrepreneurs, including Arcadia boss Sir Philip Green, circled Baugur’s £1bn-plus debt and the chains themselves.
But a year on, the impact of Baugur’s collapse has proved to have been minimal.
Measuring the effects
Don McCarthy, chairman of department store chain House of Fraser and one-time Baugur shareholder, says Baugur’s demise “did not have an effect” on the businesses in which the investor had a stake, and that the holdings simply reverted to the Icelandic banks, themselves in a moratorium process.
“There was obviously a situation where shares were taken over,” he says. “Everyone thought the banks would act irrationally and sell their shares at a low value but the banks have maintained that value by not selling off their shares.”
He says that all the core businesses in which Baugur had an interest have remained robust.
House of Fraser, which is backed by nationalised Icelandic bank Landsbanki, is set to report one of its most profitable years in the year to January 31, 2010, he points out.
And Whistles, which was spun out of Mosaic Fashions in January 2008, has been restructured. Last month it emerged that Jane Norman’s lenders are to take over the business and restructure its debts of almost £136m.
Even Baugur’s minority stakes in public businesses including Debenhams appear to have quietly changed hands via contracts for difference.
However, the process was not without its strains on businesses, and for one in particular it contributed to its pre-pack administration.
Mosaic Fashions, arguably the greatest casualty in the Baugur empire, went into administration in March 2009 but was reborn as Aurora Fashions - stripped of its footwear concession business Shoe Studio Group, which was rescued by Dune, and of womenswear chain Principles, which Debenhams subsequently acquired the brand rights to. Baugur had held a 49% stake in Mosaic Fashions, with Icelandic bank Kaupthing holding the all-important debt.
However, Aurora Fashions chief executive Mike Shearwood, who was deputy chief executive of Mosaic Fashions at the time of its collapse, says Baugur’s demise had a minimal impact on the business.
“We weren’t affected directly by the collapse of Baugur,” he says. “We were affected by the collapse of the Icelandic banking system and the effect this had on Kaupthing. In hindsight, from that point on our fate was sealed.”
He adds: “We announced solid half-year results in September and a month later the bank went into administration. We lost a £75m working capital facility and a significant dollar hedge for 2009 at over $1.90. The combination of these factors had a significant impact on our profits and subsequent valuation.”
However, insiders argue that Mosaic Fashions’ deal to buy Rubicon Retail in 2006, which owned Warehouse, Principles and Shoe Studio Group, was ill-fated, and created a too-large group that was never fully integrated. Baugur had stakes in both groups and is said to have played a leading role in encouraging the merger.
Man in black
Any association with the Baugur team, headed up by founder Jón Ásegir Jóhannesson - black-suited and known for throwing flamboyant parties - proved poisonous for some in the eyes of credit insurers in particular.
Mosaic Fashions struggled as credit insurance was withdrawn, as did young fashion chain All Saints, in which Baugur had a 35% stake.
“All the speculation surrounding Baugur fuelled credit insurance issues which put pressure on cash flow,” says Shearwood.
He adds: “A year ago, we were having to spend significant amounts of time managing the supplier base to ensure the continuation of stocks.”
McCarthy sympathises with those businesses that went through a restructuring process. “No one should ever underestimate the time spent going through something that is not core to the business,” he says.
“If the business was healthy and performing well and growing EBITDA then the collapse of Baugur was just an annoyance, but if the business was in trouble then it was a problem.
The problem with credit insurance was a problem across the whole sector.”
Baugur’s former chief executive Gunnar Sigurdsson defends the Icelandic investor’s involvement in the companies and maintains it was good for them. “The reality has been that the businesses that we were involved with before have performed well. It’s testament to the fact they were good businesses, they had good management teams and weren’t over-leveraged.”
Sigurdsson maintains that Baugur “always made a point that cash flow was strong in the business” when closing a deal. McCarthy adds: “Baugur was there but not as a majority shareholder. People on the outside saw Baugur as an investor and presumed the whole thing would blow.”
One source close to Baugur adds: “The impact has been minimal. Baugur went into administration, the holdings went to the Icelandic banks and the banks said there would be no change. Everyone was forecasting blood on the high street and there wasn’t.”
Baugur was perhaps a concentrated example of what happened through the previous decade; raising capital easily and moving quickly to secure deals. The Baugur source adds that Baugur was able to become successful because of easy access to finance, the like of which is unlikely to be made available again.
McCarthy adds: “At the time, there was a great momentum and great spirit and passion to build something. There were probably too many deals. Had we stayed more focused on some of the bigger companies we bought we would have continued to be successful.”
He adds: “If the banking crisis hadn’t happened we would have survived, sold off assets and deleveraged. But to have sold them off at a cheap value would have been an injustice to shareholders.”
So will Baugur and its team rise again? Sigurdsson is on the board of House of Fraser, jewellery business Aurum, frozen food retailer Iceland and toy retailer Hamleys, and McCarthy, Sigurdsson and Jóhannesson are all directors of JMS Partners - a business set up late last year as a retail consultancy.
Sigurdsson says investors like Baugur can be successful again. “There is a lot of benefit in having an investor that has that speciality and knowledge. We can do a lot of good. We demonstrated that.”
He adds: “There was always a vision. On balance, strategically we were very strong but we just got caught up in the storm in the markets.”
Another source adds: “Smart people have a habit of coming back. I don’t think you can blame them. They had made the most of the financial system. As their banking system fell, so did they.”
Shearwood says of Baugur: “They will be remembered for their audacity, braveness and bold moves. It was a reflection of the noughties.”
Baugur’s fashion empire: then and now
Baugur began raiding the UK high street with an audacious but failed attempt to snap up Arcadia in 2001. It made its first mark on the retail sector with the acquisition of toy retailer Hamleys in 2003.
By the time of its collapse in February 2009, Baugur held stakes in some of the best-known UK retailers
Then 49% stake
Now Underwent pre-pack administration in March 2009.
Now named Aurora Fashions, the group comprises Oasis, Warehouse, Karen Millen and Coast after selling Shoe Studio Group to Dune and putting Principles into administration
House of Fraser
Then 35% stake (via Highland Acquisitions consortium)
Now Set for a profitable year. Like-for-likes rose 7.1% over the eight weeks to January 2
Then 35% stake
Now Received £30m investment from Lloyds TSB Corporate Markets in July 2009 to fund retail expansion
Then 39.5% stake
Now Lenders restructured its £136m debt in January 2010
Then Size of stake unknown
Now Refinanced in February 2009 after Jane Shepherdson (formerly of Topshop) headed a management buy-in funded by a consortium including Baugur