Feb 18, 2011

Private equity to blame for REDgroup collapse

The private equity model of buying companies and loading them with debt was completely inappropriate for a company facing tough market conditions, writes Glenn Dyer.

Glenn Dyer — <em>Crikey</em> business and media commentator

Glenn Dyer

Crikey business and media commentator

We had a lot of ink and hot air expended this morning on the collapse of the REDgroup, which owns the book chains, Borders, Angus and Robertson (in Australia) and Whitcoulls in New Zealand.

There was much hand wringing about how tough it is, consumer caution, internet book purchases, electronic readers, the value of the Australian dollar, and very little delving into the various databases of the respective newspapers to try and piece together an informed report on why this collapse happened.

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4 thoughts on “Private equity to blame for REDgroup collapse

  1. michael r james

    What you haven’t explained is what happens with a full bankruptcy? What if someone (who knows how to run bookstores) buys it out to keep running the shops. Of course the purchase price would have to be sustainable and would have to be debt free. Who loses money here—-I am hoping it is REDGroup and PEP (since this has happened before they were able to have their IPO and offload the toxic bundle to idiot institutional investors in the way Myer was) or have they been able to structure REDGroup so banks or someone else cops the loss?

  2. Gavin Moodie

    Thanx for this informative piece.

    Surely the losers will be (1) any equity invested by the owners (2) lenders if their debt wasn’t secured by a mortgage or other charge over the business (3) lenders which secured their debt with a floating charge over the business (4) any lender which secured its debt with a guarantee from a parent company or other related entity with substantial assets, etc.

  3. michael r james

    Gavin, excuse my naivety on those kind of things.
    I read today that $100M of the REDgroup’s debt is to PEP so I can only hope that PEP suffers an actual hit to its bottom line. For once the balloon burst before they could offload it in an IPO to the usual suspects/suckers and recover their dosh (I’ll bet a lot of which is not real debt but pimped up management fees etc.).

  4. Gavin Moodie

    I’m no insolvency specialist, but I imagine that it depends on how Pacific Equity Partners’ investment was structured. You will recall that Macquarie Bank is a family of companies which channels investors’ funds into specific projects, while the holding company doesn’t invest its own capital but takes a management fee. Pacific Equity Partners may also be structured to protect the holding company’s capital from the failure of any of its projects.

    But even if that is the case, the investors would be the first to lose their capital and from what you say at least Pacific Equity Partners’ investors have suffered a substantial financial loss. This will damage PEP’s reputation amongst investors considerably and will reduce its capacity to raise funds in the future for new projects or even to increase the capitalisation of existing projects.

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