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ScS Group listing – a pre-pack phoenix relists

Upholstery and flooring retailer ScS Group Plc (SCS) joined the main market of the LSE on the 28th January.  At the placing price of 175p the market cap was £70m.  Now you may recall that this company used to be listed a few years ago, but went into administration in July 2008. It’s useful to look back at what happened then and at some aspects of the current business in case you are considering an investment in the company.

In 2008 the company (and it’s much the same company now with the same management) experienced some trading difficulties. In May 2008 they reported sales order intake as down 14% in the previous 8 weeks, and in the last 41 weeks the like-for-like order intake was down 15%. There were simply fewer people buying big ticket furniture items at the time. The last reported financial figures in March showed a substantial loss and in June 2008 the company reported a “strain on the working capital needs of our suppliers” due to the withdrawal of credit insurance (i.e. nobody would insure the debts of the company to its suppliers). But the company reported it was cash flow positive with no net debt.

The business went into one of those notorious pre-pack administrations soon after and was instantly sold to Sun Capital who have had a controlling interest in it since then. The announcement at the time said “The sales of the ScS Business to Parlour [the Sun investment vehicle] is expected to provide the necessary investment and to protect therefore the ScS business’s employees, trade creditors and customers, as well as helping to secure the future of a number of its suppliers with workforces in the UK and continental Europe”. Indeed it seems likely that the only people who suffered were the ordinary shareholders in the company as it otherwise continued to trade normally, and presumably the trade creditors got paid as it continued to deal with the same suppliers.

The reason this might be called a “phoenix” administration is because the same business continued after the administration as before, with indeed the same management. David Knight is still the CEO as he was at the time of the administration, Ron Turnbull remains the finance director and Kevin Royal still works in the business as Sales Director.

What happened subsequent to the administration? Sun Capital put in £20m of cash in 2008 to stabilise the business based on what it says in the latest prospectus, after paying £1 to the administrator for the operations. It is not known what they have taken out in the meantime, but from the IPO where they have sold a substantial proportion of their holding they have realised £35m plus still hold 41.6% of a business worth £70m at the placing price (i.e. £29m). You can see it has been an extremely profitable investment for Sun Capital, as are many pre-packs for those involved in these deals.

In addition to their existing 41.6% stake in the listed company, Sun also can appoint the Chairman of the company, so they will continue to have a very substantial influence over it.

Given the history, investors might be wary of backing the same management team who failed to cope with a previous downturn in business, but it has not stopped a slew of institutions taking up shares in the placing. The dominance of the listed company by Sun has not put them off either, but private investors should perhaps be more wary. The experience of similar company DFS Furniture being taken private at an opportune time by a dominant shareholder should be a warning.

ShareSoc has criticised pre-packs in the past and was hoping for some action by the Government to reform the insolvency regulations, but since 2011 when a very minor change to the regulations was made, absolutely nothing appears to have been done.  But the Insolvency Service has at least published a “How to” Guide called “Complain about misuse of the pre-pack administration process” which you can find on the internet. Obviously they must get a lot of such complaints but complaining after the event rarely does one much good in these cases.

This note was written just to remind people how devastating such administrations can be to investors, while the former directors can continue to earn a good living from the same business. The process is surely in need of a total reform, although the circumstances that finally arose at the time of the administration at ScS might have been difficult to escape from by other means. But the lack of foresight regarding possible funding needs surely reflects poorly on the management.

Roger Lawson

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