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Business Analysis & Features

The legacy of Comet: poor get poorer, rich get richer

A token £2 investment could yield a multi-million pound return for the owners of the collapsed electrical chain, says James Thompson

The human cost of Comet collapsing into administration on Friday is now clearer for staff and customers of the failed electricals chain.

More than 6,600 jobs are at risk at the 236-store retailer while among the hordes of Comet customers who found themselves unable to use Comet gift cards at the weekend was a mother who had a £500 voucher from the charity Family Fund to buy an iPad for her son, who has cerebral palsy.

In stark contrast, the private-investment firm OpCapita and its US backers, thought to include Elliott Advisors, could make millions of pounds from their acquisition of Comet from Kesa Electricals (renamed Darty) for a token £2 in February.

With possible buyers thin on the ground, OpCapita and its investors, as the top creditors, will be among the first in line to receive a payout from an expected liquidation sale at Comet before Christmas, with its stock estimated at £120m.

While more than half of this stock belongs to suppliers under "retention of title" terms, OpCapita and its backers could recoup about £50m from the likely liquidation.

Comet is merely the latest retailer to come a cropper after falling under the ownership of a so-called investment company, or private-equity firm.

The fashion chain Peacocks, the lingerie retailer La Senza and the gift specialist Past Times suffered a similar fate this year.

Indeed, the prospect of OpCapita, whose founder and chief executive is Henry Jackson, toasting another profitable exit from a troubled UK chain has got plenty in the retail sector hot under the collar.

Under its previous guise as Merchant Equity Partners, OpCapita acquired flat-pack furniture retailer MFI for a nominal £1 in 2006. While MFI collapsed into administration for the final time in November 2008, OpCapita has boasted it made a "small profit" from the now-defunct chain.

But Mr Jackson has vehemently previously denied the firm is a liquidator, stressing it focuses on realising value through operational change. Sources cite its efforts to turn around Comet: such as hiring John Clare, the former chief executive of Dixons Retail, which owns Currys and PC World, as Comet's chairman; and reducing its costs through cutting the number of head office and support staff.

In reality, Kesa was also desperate to offload Comet, which made an estimated loss of £35m in the year to 30 April 2012, on revenues of £1.3bn. Furthermore, OpCapita was the only game in town to rescue it.

Critical to getting the deal away was the £50m dowry that Kesa paid for OpCapita to take Comet off its hands. But OpCapita placed the dowry, a £30m working capital facility, and a £40m asset-backed loan into an investment vehicle, Hailey Acquisitions. By structuring the deal through this parent company, OpCapita was able to protect its own funds and those of investors, including London-based Greybull Capital, in the event of a administration. While ring-fencing their investment may seem controversial, it is common with private-equity deals and the truth is that the deal would probably not have happened had the dowry been placed straight into Comet.

Sources have played down the prospect of a quick, or major, payout for investors from its warranties business, Triptych Insurance. They cite the fact that the warranties sector is tightly regulated and that sufficient funds would have to be held to meet the terms of three to five-year repair, or replacement, contracts.

But the reality is that Mr Jackson and OpCapita's investors are likely to come out of the expected liquidation of Comet smelling of roses. These flowers, or the more traditional poinsettia, might be all that some of Comet's staff can afford this Christmas.

Nick Hood, an analyst at Company Watch, the credit information specialist, said: "No doubt the strategies adopted by OpCapita have been based on sound legal advice, but when 7,000 UK jobs are at risk and Comet's creditors, landlords and other stakeholders face huge losses, the morality of this unhappy retail adventure will assume far greater importance in the years to come in the eyes of the business world."