Profiting from retail misfortune as it does, restructuring specialist Hilco is much maligned. George MacDonald asks if the rancour is deserved

Like Marmite, retail restructuring specialist Hilco provokes strong reactions in the retail industry. And more often than not, mention of Hilco precipitates a stream of vitriol. Ambulance chasers, asset strippers and undertakers are three of the more printable terms sometimes used to describe the firm, which has played a prominent role in many of the most high-profile retail collapses of the past decade.

Hilco made headlines again in the past fortnight when its investment arm Valco backed the acquisitions of bookseller Borders UK and beleaguered floor coverings specialist Allied Carpets.

Allied Carpets, the bigger of the two businesses, was bought out of pre-pack administration. Hilco took control of 51 shops and Allied Carpet’s lucrative insurance business, safeguarding 400 jobs. The new business – Allied Carpets Retail Limited – may buy some of the other 166 shops, but 1,100 jobs remain at risk.

A comment posted on Retail Week’s website is typical of the view many have of Hilco. The contributor wrote: “I give the retail business six months, just enough time for Hilco to sell the freeholds and asset strip the remainder.”

It’s a perspective that has dogged Hilco for as long as the firm – part of a giant US group – has operated in this country. In 2002, when Hilco was still an emerging player in the UK, the administration of Scottish homewares retailer Texstyle World prompted bitter recriminations. The store group had been put on the road to recovery after emergency surgery by chairman Jim Bellingham, a former Laura Ashley finance director, and chief executive Ken Lemond, and it was understood that Texstyle World was on track to return to profit that financial year.

Hilco bought Texstyle World in December 2002 and within a week put the 57-store business into administration. The former turnaround team were furious. Bellingham told Retail Week at the time: “We’re concerned that it is trying to strip the assets. Hilco has to rethink its position.” Lemond said he was “absolutely staggered” that it was thought necessary to put the retailer into administration.

But Hilco’s Texstyle World deal is understood to have netted £7m for the troubled retailer’s banks. It is that trait – Hilco’s undisputed ability to claw back cash from crisis situations – that has made the restructuring outfit so successful and indeed highly regarded among financial institutions and retailers alike.

The all-seeing eye

One banker who has dealt with Hilco observes: “If anything is up for sale or there’s the most minor level of distress, Hilco knows about it. Professionals beat a path to its door.”

The roll call of Hilco projects reads like a retail obituary page. There have been few stores sector shipwrecks in which it has not been called upon to man the lifeboats or collect the corpses – depending on your point of view.

Starting with smaller names such as Northeast department store group Upton & Southern and Texstyle World, Hilco went on to play pivotal parts in the unwinding of once-proud names such as department store business Allders, value specialists Ethel Austin and MK One and – the biggest of them all – Woolworths. Hilco was keen to buy Woolworths and restructure its debt before its collapse, and ended up running the variety store group’s closing down Sale on behalf of administrator Deloitte.

Hilco’s practices have often been controversial. In the case of Allders, for instance, it was part of a consortium that bought the retailer’s debt at 26p in the pound. Following its administration, it is understood the consortium members got back 90p in the pound. However, Allders staff were left reeling when it emerged that there was a black hole in their pension fund. This may have had nothing to do with Hilco, but the contrast in fortunes between the debt owners and the pensioners left a sour taste in many observers’ mouths.

Such projects unsurprisingly result in ill-feeling among those left out of work and out of pocket, but Hilco chief executive Paul McGowan – number 93 on Retail Week’s industry power list – takes criticism on the chin.

“Hilco has often become involved with a business as a last resort for the owners or lenders,” he says. “In cases where a business has already failed, Hilco delivers a very efficient methodology for the management of the administration that maximises recoveries for creditors and banks. This tends to place Hilco in the front line from a PR point of view.”

But he believes that Hilco’s approach is better for all concerned – including customers and staff of troubled retailers – than alternative methods employed in such situations.

McGowan points out that many of the retailers with which Hilco has been involved were successfully taken through a recovery process and continued to trade afterwards. Ethel Austin is one prominent example, now owned by entrepreneur Elaine McPherson. Others such as Texstyle World and Ciro Citterio were also successfully sold on. Although the new owners of the latter two each later hit trouble, the subsequent problems occurred long afterwards and were nothing to do with Hilco.

Hilco is one of several restructuring specialists in the retail sector, alongside competitors such as Gordon Brothers and Great American Group. Although Gordon Brothers in particular adopts
a lower profile and is almost certainly involved in more projects than have made it into the public domain, few would argue that Hilco has become the dominant player in the sector.
How did it establish such a strong franchise? McGowan replies: “We have the imagination to see things that other people ignore.”

That may be evident in the Allied Carpets deal, in which the insurance business plays a bigger part than is often realised. As one person commented on RW Online: “Allied Inspections is a separate company to Allied Carpets Retail and will be supplying insurance quotes and claims assistance to all retailers including Carpetright. Allied Carpets has long had a strong insurance department, dealing with a large market share very well. Now it has the opportunity to be a standalone company.”

Point of difference

Aside from the ability to spot opportunities, McGowan maintains there are other differences between Hilco and its competitors. He says: “Structurally, we are very different. Our team are experts in the design and management of change within retail businesses and that expertise has been developed in a very focused, hands-on way over the past nine years in most retail sectors. We have everything in our business that you’d get in a retail business.”

McGowan himself has a retail background. He ran the British arm of US womenswear firm Leslie Fay, which had UK department store concessions. It withdrew from the UK in 1996, providing McGowan with first-hand experience of closing retail operations. And Hilco has traditionally been steered by veteran retailers. McGowan set up Hilco’s UK business with former Harrods boss Paul Taylor, for instance, and can draw on stores sector experience in most fields and at many levels through the many individuals who work with Hilco on an ad hoc basis.

The banker believes that wide experience and network has helped Hilco become preeminent. He says: “It is very good on UK retail – it gets it. It puts good operatives into stores and gets more money back than you’d have thought.”

That operational nous was evident in projects such as Hilco’s appointment by Primark-owner Associated British Foods to manage the transfer of Littlewoods shops to Primark and New Look, or DIY group Focus’s handover of stores to Homebase. It was evident too in the running of Woolworths’ closing down Sale.

Retail skills will be much-needed at Allied Carpets, which had stumbled along for years before being sold to a consortium including Hilco, its subsequent administration and then the acquisition by Valco.

McGowan says he hopes that Valco’s emergence will “lay to rest” some of the negative perceptions about Hilco. “Valco invests in turnarounds where a longer-term investment, allied with our expertise and resources, is really what is needed,” he says.

Often described in the press as Hilco’s private equity arm, McGowan says that term is inaccurate. Valco is focused on distress situations, instances when administrations may be necessary and the level of return may not be the same as a private equity firm would seek.

Before Allied Carpets, Valco bought heavily indebted pottery manufacturer Denby in a £30m deal earlier this year. While this is recent deal and so too soon to read too much into, it still gives a good indication of what Valco can bring to the table and suggests that Allied Carpets may not be destined for the dustbin as some observers fear. McGowan says of Denby: “We’ve been there for six months and the business has done really well. There’s a lot of potential for upside.”

The banker says that Valco’s involvement at Allied Carpets indicates “it is getting in for the long term”. He says: “Valco could signal a change. It’s clearly not a private equity model – it is going in to shrink it and then grow it back.”

But the retailers that Valco has parachuted into Allied Carpets have raised eyebrows among some in the industry. Steve Johnson, chief executive of Woolworths at the time of its demise and Gary Favell, who put now-defunct MFI into administration twice in two months, will play key roles. Clive Hatchard, the former finance director of failed Land of Leather, has also been brought on board.

Can people associated with such collapses really turn around Allied Carpets? McGowan says this is a “narrow minded” view. He argues: “We’re attracted to people who’ve been through the insolvency process because their awareness of solutions is much higher. They’ve been there, done it and they understand the pace is much faster than in a normal retail business.”

Ian Gray, retail restructuring expert and chairman of hardwares retailer Robert Dyas, agrees that Hilco acts fast, – which is essential in distress situations. “If it is going to do a deal it can write a cheque – it is very quick at making decisions,” he says.

As controversial as Hilco may be, it has become part of UK retail’s ecosystem and looks likely to remain so. Despite the criticism it often faces, the benefits it can bring in difficult circumstances should not be overlooked.

The banker says: “When we dealt with Hilco, it did what it said on the can. From a bank’s point of view, it is very straightforward and honest.”

All eyes will now be on Allied Carpets to see whether a revival can be masterminded. If so, then an intriguing question arises. Given there is little dispute that there was a profitable, if smaller, retail business trapped inside Woolworths, had Hilco managed to take control and administered its admittedly strong medicine, would the variety store group still be present on the high street today?

What Hilco does

  • Acquire underperforming companies
  • Retail operational  management
  • Provide financing  for acquisitions
  • Partner with private equity groups
  • Purchase distressed  debt
  • Manages store closure programmes

Heading Hilco: Paul McGowan

Hilco is run by chief executive Paul McGowan, a Northern Irish accountant by training who set up the restructuring firms UK operations with former Harrods boss Paul Taylor.

Despite making a living from distressed companies, you’d be hard-pressed to meet anyone more jovial and affable. From his offices overlooking Oxford Street, McGowan enjoys ringing Debenhams chief executive Rob Templeman and ribbing him about how many – or how few – shoppers are going through his doors.

McGowan’s lieutenant at Hilco is Andrew Pepper, chief operating officer and a former partner at Kroll who frequently worked alongside Hilco on collapses such as Allders.