Green's tartan links mutually beneficial

Published on Friday 18 November 2005 01:00

ONE of the strangest results of retail billionaire Philip Green's entanglement with the Scottish business community has been the radical overhaul of the venerable Bank of Scotland, turning it into a major player in corporate banking.

It all began in the early 90s when Tom Hunter, king of trainers and shell-suits, had been introduced to Green by Ian Grabiner, then a bright young executive at the Glasgow-based What Everyone Wants. Green and Hunter hit it off. Hunter had built up his business from scratch, a feat that Green had never achieved. Green admired him for it. Hunter, in turn, was impressed by Green's no-nonsense style and knack of pulling off amazing deals.

In some ways, Hunter and Green were an unlikely pair - a rather taciturn and polite Scotsman and a motormouth Londoner with a "mockney" accent and stream of colourful language.

It was not until 1995 that they completed their first big deal. Hunter had ambitions to expand his Sports Division south where the Olympus Sports chain was rumoured to be up for sale.

The trouble was the fresh-faced Scot (still only 34) was not taken seriously by Olympus's owners, the giant Sears company. So Hunter phoned Green to see if the older man could help out by acting as negotiator. He and Green decided to seek the support of the Bank of Scotland.

By an extraordinary stroke of good fortune, when Green and Hunter turned up to discuss the plan at the bank's HQ on the Mound, they were introduced to Peter Cummings, yet another Scotsman who was to help Green on his way to fame and a very substantial fortune. At 39, Cummings was already a senior manager in the corporate banking department. In another life, he might have been an entrepreneur himself. Hunter and Green found him a man with a sympathetic ear and a sharp business brain.

They left the meeting with the deal more or less sewn up. A few weeks later Hunter's company swallowed up Olympus at a bargain price of just 20 million, with the Bank of Scotland making up any shortfall in Hunter's resources. A grateful Hunter made Green chairman of his company and granted him 13 per cent of the shares as a "thank you" gesture.

When, three years later, Hunter sold the Sports Division empire for 290m, Green pocketed some 38m.

Soon after the Sports Division sell-off, Green sounded Cummings out about providing finance on a much bigger scale. The proposition was simple. Sears' retail business was creaking along. Its assets included famous names such as Wallis, Warehouse and Freemans, the mail-order business. Green proposed buying it through a hostile takeover. It would mean the Bank of Scotland providing around 300m. As to how Green could turn a loss-making shambles into a profitable deal, the answer was simple. He would sell off the component parts.

Cummings put his faith in Green and he was not to be disappointed. Within a year the stores had been sold and all the loans paid off.

The Sears deal cemented the growing friendship between Cummings and Green. In 2002 Green had set his sights on Arcadia, the Dorothy Perkins-to-Burton group, already 20 per cent owned by the Icelandic firm Baugur. Under the deal, Baugur was to have the glamorous properties - the Top Shop and Miss Selfridge stores - leaving Green with the less exciting brands. But - in the middle of the negotiations - the unfortunate Icelanders suffered the temporary embarrassment of being raided by the Icelandic fraud squad and were forced to pull out.

Green made an anxious call to Cummings who was putting together a package of 600m and was caught on the hop when Green explained he needed to raise another 200m. But Cummings went with his instincts. He would fill the gap.

It was the sort of quick decision-making unthinkable in traditional banking circles only ten years ago. It marked Cummings out as a new breed of entrepreneurial banker.

The chief beneficiary was to be Green. With Top Shop and Miss Selfridge on board, Arcadia went on to become a star performer, delivering a big jump in profits that allowed a dividend of some 460m to be paid to Green in 2004.

But, rubbing shoulders with Britain's most successful deal-makers had convinced Cummings that banks were missing a trick by being merely the providers of loan capital. In 2000, he had launched his pet project to offer companies a package of "integrated finance". Under this scheme the bank would not only lend money but take shares in the company.

The Arcadia deal proved a useful shop-window for the scheme. Under it, the bank took an 8 per cent equity interest in Green's new acquisition. Last month it received its share of the billion-plus dividend. On an investment of just 1m made only three years previously, the bank received a payback of 100m. It was, said Cummings, "probably the best single investment anyone has ever made".

Green, of course, has done even better. His 92 per cent share of the equity yielded nearly 1.2 billion. And to add a twist, the dividends were to be financed by borrowing 1.3bn on the European markets.

Cummings defends a practice that might strike many a thrifty Scot as reckless. It's based, he says, on "sound financial principles"; the company's earnings will easily cover the interest payments. Of course, no-one can foretell exactly what will happen over the next five to seven years. But, with profits rolling in, and Green for the moment in the ascendancy on the high street, he is unlikely to be suffering sleepless nights.

• Top Man - How Philip Green Built his High Street Empire by Stewart Lansley and Andy Forrester, 18.99 hardback.