Yorkshire Vision: Investing in determination

In April the government released the growth statistics for the first quarter of 2013 highlighting that the UK has narrowly escaped a triple dip recession. The modest growth figure of 0.3% is a huge reminder that the UK is not out of the woods yet and there is much to do to get UK plc back on track.

In Yorkshire you could be forgiven for thinking that the recession is truly over and recovery is firmly on the way. A pristine new shopping centre in Trinity and a spectacular new Events Arena have given Leeds a huge economic boost whilst the Tour de France Grand Depart will inject millions into the Yorkshire economy next year.

These are all hugely positive events for Yorkshire but notably they are weighted towards the leisure and service sectors. Manufacturing and other sectors in the region are finding it hard to get traction with rising input prices, a weakening pound and limp demand. Their ability to overcome these pressures often rests with their ownership. You will have read the many stories regarding the increasing number of ‘zombie’ companies that are trapped in a web of debt and going nowhere. They are not strong enough to thrive nor weak enough to die but are simply the walking dead offering no contribution to the recovery of the economy. 

This problem is not isolated to companies where banks are the de-facto economic owners but extends to large corporate groups too. As economic conditions have deteriorated over recent years the larger corporate groups have reacted by retrenching to focus on ‘core activities’ and ‘core markets’. Their appetite to grow and diversify has abated and their Boards are playing it safe, sticking to what they know and strengthening their balance sheets.

This behaviour has created a raft of abandoned, under invested and unloved non-core companies. In Yorkshire the transformational investor Endless, has seen this trend increasing with introductions to these ‘orphan assets’ doubling over the last 12 months.  Their recent investments into Karro Foods and the retailer, Bathstore are testimony to this recent trend. The Karro acquisition represented Dutch Parent Vion NV’s desire to focus on its core European food operations whilst the Bathstore acquisition signalled Wolseley’s retreat from its expansion into retail to concentrate on its core markets. 

Most orphan companies tend to exhibit the same characteristics: a demotivated management team, significant underinvestment, an overweight cost base whilst being cash starved and strategically rudderless. It is almost a certainty that these orphan companies stagnate as the absence of parental support takes its toll on the business.  A decline in profitability becomes almost inevitable.

Bathstore, which operates 9 stores across Yorkshire, was no exception to this. Its new Chief Executive Gary Favell explains: ‘Non core companies tend to be badly neglected as the parent often doesn’t have the expertise internally to shape and execute a strategy. This translates to poor operational practices and this was evident at Bathstore when we acquired it.’

This neglect of non core assets is not just a feature of large UK corporates but overseas parents too. Endless have also seen a rise in foreign owned subsidiaries starting to struggle. In particular Endless has observed a trend of US corporates wanting to exit the UK rather than investing.  In the last month alone Endless has seen two US owned corporates looking to divest UK businesses that have operations in Yorkshire.     

But Endless see this trend as a positive. Managing Director, Chris Clegg explains ‘A detrimental factor for any business is to have an unsupportive parent. Non-core businesses in this economy are better served with new owners willing to invest and to introduce new ideas. It can be remarkable the impact alone of just freeing a business from a restrictive and unsupportive corporate group structure.’

With Endless headquartered in Yorkshire and sitting on investable Funds of over £200 million, Yorkshire’s corporate orphans have a real chance of a new home and a fresh start. A divestment of non-core assets by the larger corporates therefore appears to be another genuine way to kick start Yorkshire’s economy.