On The Record – Henry Jackson

In October, Merchant Equity Partners, a new private equity firm launched by former Deutsche Bank executive Henry Jackson to invest in struggling European businesses, completed its first transaction with the PTP of the loss-making retail unit of MFI Furniture Group in the UK. The firm acquired the unit for a nominal £1, with up to £73 million of follow-up investment by 2008. The terms of the deal also included an entitlement for the company, rebranded as Galiform, to a minimum of five percent of any sale proceeds in excess of £300 million over the next five years. Here, Jackson talks about the deal and how it fits into Merchant Equity Partners' investment strategy.

how did the mfi deal come about?
The one thing that was clear about the MFI opportunity from the beginning was that it met the criteria exactly for an investment by Merchant Equity Partners: it is a troubled retailer that has retained its market leading position but has significant operational problems, resulting in the opportunity to acquire the business. I have been tracking MFI for a number of years, and there was an announcement by the company back in May that they would consider a sale, so we were very focused on it. We had been working on a number of other opportunities but MFI became a major focus for Merchant Equity Partners over the last few months.

Why the complex funding structure with the built-in earn-out Element when you sell up?
We thought that it was important for the public shareholders in the parent company to have the opportunity to participate in our gain at a point when it becomes large enough. We thought that we could give the Board some comfort in selling to us that if we make an outsized gain, then we would give them a chance to participate. The deal wasn’t necessarily easy to structure, but then, no deal ever is.

Is this a one-off structure, or are you expecting to do more deals Like this?
This kind of structure was very specific to this transaction. We had public shareholders who needed to be satisfied in order to approve the deal, and we thought that this was the best way to give them some comfort and move that forward. I would not, however, extrapolate any general strategy for Merchant Equity Partners on the basis of this deal, though.

what are your plans for mfi?
I can’t go in to that at this moment, and I don’t want to steal the management’s thunder, but we said at the time that we are positive about the brand and our strategy is on growing the business with a focus on quality and service.

There was talk at the time of the deal of a Possible refinancing
The reference to a refinancing was regarding our obligation to arrange a working capital facility for the business before March 2007. The business is seasonal and requires seasonal financing, so we are putting in an appropriate working capital facility. It was important to the Board of the seller that we make it clear that we are making a go of this. They are the guarantor of quite a few of our leases and they have credit risk, so they needed to see sufficient cash and working capital facilities.

Do you expect to be buying struggling businesses from other Private equity houses when the credit environment deteriorates?
Merchant Equity Partners is not really focused on what happens in the credit environment, we’re focused on the retail and consumer sectors, and we believe that there are always opportunities to acquire interesting businesses regardless of the credit cycle. There are always winners and losers. The opportunity for Merchant Equity Partners is about finding good businesses that are struggling because of capital or management or some combination of the two and then we can bring our sector expertise to bear, improve the performance and create value for our investors.

MFI was your first deal. Do you have a target amount of deals You expect to do?
Our focus is pan-European retail and related consumer sectors, focusing on turnarounds and undermanaged businesses, but it’s important to note that we will only invest in businesses that have a reason to exist. That might sound obvious, but there are plenty of struggling businesses out there that have no reason to exist any longer. We’re not asset strippers, we’re rebuilders. That is why MFI was right in the crosshairs of what we set out to do – take a business with potential, put in a significant amount of capital and new management and take the time to turn that business around.