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Russell Gilling & Border's FD Mark Raban

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Asset-based lending advice

By Russell Gilling on June 17 2008

Legendary investor Luke Johnson is well known for his achievements with Pizza Express and La Strada, and for being a man who likes to surprise people, such as when he became chairman of Channel 4.

He managed to turn heads again earlier this year when he acquired the UK division of the bookstore chain Borders / Books etc through his private equity firm, Risk Capital Partners.

Widely seen a struggling sector in the UK high street, especially with the popularity of ordering books online, it seemed a somewhat extravagant move to splash out £23 million.

Johnson was defiant: “We believe passionately in the future of books and think Borders has a great formula. The stores are mostly well-invested with new outlets in excellent locations. Borders and Books etc saw around 30 million customer visits last year with an average dwell time of an hour. This transaction is set to transform the balance sheet of the business going forward: it will be virtually debt free and have tangible net worth of over £75 million.”

The purchase price consisted of a £10 million up-front cash payment and an additional payment of up to £10 million of deferred cash consideration, payment of which is contingent on the future performance of the business. To show its ongoing commitment to the business, Borders Group retained a 17 per cent stake in the UK business.

Borders Group’s UK and Ireland subsidiaries recorded sales of approximately £223 million for the year ending February 2007 and made positive EBITDA of around £2 million. With 70 stores in the UK and Ireland and approximately 2,000 employees, the high street bookseller is the UK’s third largest, with an estimated eight per cent market share.

It was Landsbanki Commercial Finance, the asset based lender and leveraged finance provider, which secured the deal against the company’s book inventory and distribution centre.

Russell Gilling, managing director of business development at Landsbanki CF says that “the facility will provide Borders with the ability to carry out its restructuring, store improvements and provide ongoing liquidity to the business”.

Working closely with property and asset management specialist Edward Symmons, Russell notes that the main challenges centred around the number of locations where banks held inventory collateral. “Ongoing monitoring systems have been implemented to enable the appropriate levels of reporting and to give us the comfort we require. In addition, we had to carry out some work in respect of retention of title as this will impact on the value of our collateral.”

During the past 18 months, Landsbanki has worked with a number of retail outlets, such as Austin Reed, Allders of Croydon and MFI. At a time when funding options are drying up, Russell says those retailers with funding linked to inventory “on an evergreen revolving basis and no capital repayment burden to contend with” are in a better position to grow in these tougher times.

Indeed, for many companies, it may be the only viable source of capital. Russell says: “With the level of traditional cash flow lending receding, opportunities for ABL’s have increased due to secured facilities providing the banks with an attractive risk profile. As leverage multiples fall alongside liquidity, we expect asset-based solutions to be more prominent going forward.”

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