Saving the Comet that crashed to earth

What did Henry Jackson see in a retail chain he was paid to take on, asks Erikka Askeland

WHEN Henry Jackson realised he had landed the deal to buy Comet, the struggling UK electronics retail chain, he smiled to himself. Not only had his firm OpCapita beaten his rivals over at Hilco, another retail specialist fund looking to scoop up bargains amongst the wreckage left by failed firms on the UK high street, but the terms were to his satisfaction.

The headline writers would largely focus on the fact he got the chain for a nominal £2 sum, but the real story was the fact that Kesa, the soon-to-be-former owner of Comet, had also agreed to hand over a £50 million dowry to Jackson’s investors.

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David Newlands, the chairman of Kesa Electricals, had been blunt in his estimation of the deal. “The £50m is categorised as an investment, but the truth of the matter is we had to pay £50m to get the business away,” he said. “We will be writing it off as having no value.”

Newlands’ comments laid bare the grim times facing all retailers. The tightening seen in household budgets is acute. Where previously a widescreen TV was considered a must-have, it is increasingly becoming an unaffordable luxury for many households facing job losses and heavy debt.

As a result, most commentators have suggested that the UK market now has too many shops selling TVs, computers, white goods and vacuum cleaners, as these are exactly the sort of big-ticket items that cash-strapped consumers are not spending their money on.

Since the recession put a stranglehold on household spending, the victims have been high-street stalwarts where a combination of poor management and big debts have caused their collapse. They include Habitat, Rosebys, Woolworths and Zavvi.

Yet while gaps have appeared in high streets across the UK, until recently the out-of-town retail centres, with their lure of free parking and a host of discount outlets, have been seen as a safer bet. But they are starting to feel the rot too. In addition to giving up big-ticket items, shoppers seem to be giving up on long drives.

The effects have been dramatic for electronics retailers in recent weeks. Last week, Best Buy pulled the plug on its ambitious plans to create a chain of big-box electronics stores across Europe. The joint venture between the US-based firm and Carphone Warehouse also decided to close the doors of the 11 UK megastores.

And the biggest of the big-box retailers, Dixons Retail, which also owns Currys and PC World, has its own troubles to face, including a 3 per cent fall in like-for-like sales last year and plans to close 150 of its 600-strong UK store portfolio.

So why was Jackson pleased to have acquired a chain of 250 UK shops perceived by its owners as having no value?

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The American, who has lived in the UK for 12 years, feels more optimistic about the market than Comet’s current owners. “It is a good business in a good sector,” he says. “I know not everyone agrees, but what we are doing is retailing products that everyone wants. If there is one sector that has experienced growth and changed and become more and more desirable it must be the world of consumer electricals.

“The evolution in technology is driven by manufacturers such as Apple and Sony that invest huge amounts of money in R&D to make us need products we didn’t even know existed a year or two earlier. That is a fantastic machine.”

He believes that the Comet brand is a strong one and not unlike the French homewares firm called BUT that his firm acquired from Kesa last year.

However, OpCapita can also smile about the structure of the deal. Through some recently formed vehicles, known as Hailey Holdings, Hailey Acquisitions and Hailey 2 LP, Jackson only needs to raise a mere £30m from investors. This was ameliorated by a £40m lending facility, while Kesa will cough up the £50m, which will be sufficient to keep the loss-making firm going for at least two years. Not only this, but the seller agreed to keep a massive £40m pension liability.

Jackson has done this sort of deal before. A former star retail-sector banker at Deutsche Bank, the American wheeler-dealer’s previous venture capital firm, Merchant Equity Partners (MEP), was involved in the acquisition of troubled furniture chain MFI in 2006.

In this deal, Jackson also bought the 192-strong chain for a nominal sum of £1 from its owners Galiform. Although the firm made dramatic changes to the business, in 2008 the world changed abruptly. MEP sold it to one of its backers, Hilco, which moved to a drastic strategy of shutting stores before being forced to put it into administration the following year.

Following that deal, MEP became OpCapita. Its personnel now includes former retail heavyweights such as John von Spreckelsen, who turned around Somerfield and Budgens supermarkets, and David Hamid, the former Halfords chief executive.

With the acquisition of Comet agreed and set to be approved by Kesa shareholders in February, Jackson has some tricks up his sleeve to bolster the ailing firm’s fortunes. This in turn will benefit Kesa, which stands to benefit if Comet’s performance improves and it is sold for more than £70m.

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The private investors behind OpCapita are happy to keep Comet’s existing management team led by Bob Darke. This is despite the fact that he only stepped up to the managing director’s role in March to replace Hugh Harvey, whose sudden departure was noted as “a bit of human sacrifice” by analysts. Just this week, the retail chain welcomed a new commercial director, while the search for a finance director will be launched to shore up what has been a problematic lack of leadership for Comet.

But the management will be backed by OpCapita’s retail bigwigs – the most high profile of these being John Clare, the former chief executive of Dixons Retail, who was spotted visiting some of the more poorly performing Comet stores before the deal with Kesa was agreed last week.

For 15 years Clare led the transformation of Dixons from a seller of fax machines and VCRs to the leading retailer of all things desired by gadget lovers and computer whizzes.

He oversaw its move from being a mainly UK-based retailer making a pre-tax profit of £70m on £1.8 billion of sales to an international brand making profits of £300m on sales nearing £7.5bn.

OpCapita also points to its three and a half year ownership of BUT, during which the business has been transformed.

It wants to see this happen with Comet too. The firm expects a short-term boost to sales of TVs ahead of the Olympics, as well as the ongoing digital switchover.

Ben Hunt, an analyst with Oriel Securities, believes that the market for electricals is “too small in the UK for three major retailers”. Now, of course, there are only two.