Turnarounds are risky, but the potential rewards are huge. Padraig O'Hannelly reviews the track record of a turnaround expert.
Turnarounds are risky, but the potential rewards are huge. The specialist skills of turnaround experts can add significant value to a company, and occasionally these skills are introduced by a new investor.
Whether described as 'activist shareholders' and 'turnaround specialists', Hanover Investors demonstrate this point beautifully. Targeting businesses where under-performance can be attributed to company-specific problems, rather than general sector weakness, the usual modus operandi includes:
- taking a significant minority shareholding, but not taking the business private;
- joining the board, sometimes replacing existing directors;
- re-focusing the business on its core strengths, and disposing of non-core businesses;
- selling off under-utilised assets;
- introducing new capital where necessary.
Sounds easy, doesn't it, but making such profound changes successfully is quite a challenge. So far, at least, Hanover has an enviable record. Hanover's ventures include:
4imprint
(LSE: FOUR)
-- promotional products. After Hanover bought in 2003, the company replaced its CEO, overhauled its US activities, and embarked on a restructuring program. Having doubled its money in just over a year, Hanover sold out, but 4imprint has continued to soar.
Elementis
(LSE: ELM)
-- speciality chemicals. Hanover bought in January 2005, and sold in mid-2006 at more than double the buy-price. Brought the core chromium business back to profit.
Cosalt
(LSE: CSLT)
-- diversified company including caravans and safety equipment. Having unsuccessfully attempted to sell off two businesses since Hanover joined in March 2006, Hanover's founder and managing partner joined the board in recent weeks.
Scapa
(LSE: SCPA)
-- tapes and cables. Hanover came on board in June of last year, and has so far sold off two businesses.
Renold
(LSE: RNO)
-- industrial chains. Also bought last summer, Hanover disposed of non-core businesses, and will fund the rest of the restructuring from sales of property. New factories have been opened in Poland and China.
Spirent
(LSE: SPT)
-- performance testing for telecommunications networks. Hanover affiliate Sherborne Investors bought a piece of this in August 2006; a boardroom battle ensued, which Sherborne won in December, and the CEO left last month. The results of a strategic review is expected in the coming weeks.
SMG
(LSE: SMG)
-- broadcast media, including Virgin Radio. Hanover bought in at the end of January, and within a month had scuppered plans for a merger with UTV, and orchestrated a shake-up of the board.
Plasmon
(LSE: PLM)
-- data storage. Hanover bought into Plasmon last month, at the request of the existing board.
To see how Hanover has managed to catch some falling knives without losing any fingers, just look at the share price performance in the year before Hanover got involved, and the subsequent growth:
| Prev Yr | 1 day | 1 week | 1 month | 1 year | To date |
|---|
4imprint | -52.6% | 5.6% | -0.3% | 25.1% | 228.2% | 1039.5% |
Elementis | 15.8% | 9.4% | 15.2% | 19.6% | 134.8% | 172.7% |
Cosalt | -24.0% | -0.6% | 0.6% | 3.0% | 26.2% | 41.4% |
Scapa | 4.1% | 0.0% | 0.0% | 2.9% | | 28.1% |
Renold | 14.4% | 0.8% | 1.6% | 11.3% | | 125.8% |
Spirent | -19.2% | 5.0% | 16.3% | 16.3% | | 56.3% |
SMG | -30.3% | -1.6% | 7.6% | 8.4% | | 2.8% |
Plasmon | -60.8% | 36.6% | 85.4% | 70.7% | | 68.3% |
While I wouldn't recommend blindly following any particular investor, it's certainly worthwhile keeping an eye on Hanover. It may have a lot on its plate at the moment, but considering its record I wouldn't bet against it.
Padraig owns shares in Renold.
