Doctors in at the deep end: Banks love them, but the going is getting tougher for the rescue specialists, Paul Durman finds

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The Independent Online
THE AIRLINE Dan-Air, long the butt of holidaymakers' jokes, faces a rather more sobering problem this winter. For the third year running, Davies &Newman, its parent company, must confront the threat of a cash crisis.

Having lost pounds 39m in 1990 and pounds 35m in 1991, it is something of a miracle Davies & Newman has survived at all. Most companies with such a history would have turned up their toes long ago.

The group owes its survival to David James, the so-called company doctor who arrived at the head of a pounds 30m rescue package in October 1990. But Dan-Air was in for a much rougher ride than expected. The Gulf war quickly scuppered the prospects of financial stability and recovery which Mr James held out.

By June 1991 he had been forced to seek more money, eventually securing pounds 49.3m through a huge issue of new shares. Although Davies & Newman was then heading for a pounds 35m loss, Mr James spoke of an improving trend, holding out the prospect of a strong return to profit this year and next.

Now these hopes have been disappointed, and more losses are expected this year. The lack of passengers due to continuing recession means Dan-Air will fail to build up the cash surplus it needs to carry it through the winter of 1992-93. And Mr James has again to consider ways of securing adequate financial resources to allow the company to continue to trade.

In a sense, this tale is just another illustration of the length and depth of the recession. But it also demonstrates the difficulty company doctors face in trying to match up to the sometimes extravagant faith placed in them.

One leading institutional investor says: 'This recession has been so bad and so prolonged that (corporate rescue) has not been quite as fruitful an experience as it was in the early Eighties recession. Corporate resurgences have not been so prevalent this time round.'

The trials of Dan-Air and Davies & Newman are not isolated. Other corporate patients are stubbornly refusing to respond to their medicine.

Despite the attentions of Eugene Anderson, the electronics group Ferranti International has continued to make heavy losses. Sir Lewis Robertson has had to rethink his strategy for Stakis, the hotels group. And Roy Barber's Astra Holdings slipped into receivership earlier this year.

Exceptional circumstances can be cited in each case - the difficulties of the airline industry, a huge fraud, the highly politicised nature of the arms business. But company doctors are finding it hard to repeat their earlier successes.

Few company doctors seem to like the term, but its meaning is clear enough: troubleshooters who are installed at financially sick companies by banks or shareholders who have lost confidence in management.

In the past 10 years, David James has tackled, as well as Davies & Newman, Central & Sheerwood, North Sea Assets and Eagle Trust. Despite the continuing problems of Dan-Air, Mr James has recently taken over as chairman of LEP Group. This diverse collection of companies is linked by the fact that they were, on his arrival, weighed down by large and insupportable liabilities.

Other prominent examples of this select and often high-profile breed include Sir Ian MacGregor (British Steel, British Coal, HunterPrint, Holmes Protection), Eugene Anderson (Johnson Matthey, Ferranti International), Sir Lewis Robertson (Triplex Lloyd, Lilley and Stakis), Ken Scobie (Blackwood Hodge, Brent Walker) and Roy Barber (Aberdeen Construction, Astra Holdings and Thomas Robinson).

Company doctors are often running businesses that are insolvent but for the goodwill and support of their bankers. And this is their strength: for this goodwill is frequently dependent on the presence of an individual whom the bankers admire.

Much of their work is similar to that of insolvency practitioners working on a receivership or an administration. They must shed jobs, cut costs and close or sell loss-making subsidiaries to raise money for creditors.

It may be possible for the company doctor to save the company and set it on the road to recovery simply by selling off trading subsidiaries, property or other assets to reduce the debt burden. Where a company is in more extreme difficulties, it may be necessary to arrange a 'forgiveness' of debt, a debt-for-equity swap or some form of cash injection. This will often involve long and complex negotiations with the banks. Brent Walker, the pubs and betting shop group, is the supreme example, its refinancing taking 18 months.

Shareholders rank low on a company doctor's list of priorities. As Mr James acknowledged recently when taking on yet another stricken company, the freight-forwarding group LEP, the principal beneficiaries of corporate rescue are not shareholders but banks.

Ken Scobie is chief executive of Brent Walker, the subject of Britain's biggest financial reconstruction, involving 70-odd banks and more than pounds 1.5bn. Mr Scobie says: 'The banks call the shots and they say, 'That's the name of the game or we call in the receivers.' Then the shareholders will probably get less than nothing, and we are offering them something.'

Mr Scobie says that balancing the interests of employees, shareholders, bankers and others in a rescue is a 'desperate problem. Nobody is happy with their position - it's just a question of sharing out the misery.

'All you can say is that the banks as creditors have call on the group's available resources before shareholders. That's company law.' In any case, Mr Scobie adds, by the time the company doctor goes in, 'the shareholder is a bit stuffed. He put his faith in the management that got the company into that position.'

Although shareholders may sometimes regard a company's rescue as little more than a charade, the continuation of the business under a company doctor is likely to save many more jobs than would be the case in an administration or receivership. However, it can be argued that employees would ultimately be better off if the subsidiaries for which they worked were sold to a healthy parent, rather than continuing as part of a member of the corporate living dead.

Even businesses with good prospects will face difficulties securing adequate financial backing from stricken parents. Moreover, company doctors by their nature tend to be fire-fighters rather than entrepreneurial growers of businesses.

David James has little time for this line. He says that without his appointment, Dan-Air would have 'died in 24 hours', just as Air Europe did. Most of Eagle Trust's subsidiaries would also have failed before they could be sold. 'A great many interests have been looked after. No trade creditors have lost a penny at either Eagle or Dan-Air. Thousands of jobs have been protected.'

Even leading insolvency practitioners accept that a company rescue will usually produce a better return to creditors than they could offer. Phil Wallace, an insolvency partner at KPMG Peat Marwick, says: 'A good company doctor has the advantage that he can step in and avoid the public perception of the stigma of insolvency. It is not in the banks' interest to bring about any early termination of the business if they can see a way out which brings them more return and avoids insolvent liquidation.'

This being the case, one might wonder why so many once-thriving businesses fall into insolvency. Why, for example, was so much effort put into saving Brent Walker, when British &Commonwealth, John Gunn's financial services empire, was forced into administration? After all, Brent Walker's huge number of banks and George Walker's obstinacy made it a particularly difficult company to rescue.

One reason is that deterioration in the relationship between banks and the management of troubled companies often makes it difficult to mount a rescue. The other serious difficulty is the shortage of able company doctors.

Mr James says: 'There aren't enough people who have got the institutions' confidence. I have just turned down another two rescues, one in each of the last two weeks. I don't go seeking extra work - the problem is to avoid it.'

The choice as to which companies can be rescued is often decided as much by banking politics as by strict economic logic. Insolvency practioners, frequently called in to advise on the fate of troubled companies, say banks do not like two big insolvencies in a short period. Senior bankers, sometimes prompted by the Bank of England, will make strenuous efforts to avoid such a situation and the resulting impact on confidence in the wider business community. The best way of doing this is to call for a doctor.

Mr James is the archetypal company doctor. He honed his trouble-shooting skills during 10 years at Ford, clearing up bankrupt car dealers. After another eight years fire-fighting for The Rank Organisation, he went freelance.

He works 15 or more hours a day and much of his weekends, and is well paid for his efforts. He draws pounds 35,000 a month from LEP, pounds 7,500 a month from Davies & Newman and pounds 20,000 a month from Eagle Trust - a total of pounds 750,000 a year. He is keen to point out that these sums do not represent his salary, and that out of them he has to meet office and other costs.

Mr James has scored a string of notable successes, persuading the banks to write off large amounts of their loans, or exchange them for shares, in order to keep his insolvent companies afloat. He has pulled off the trick again with LEP: National Westminster and other banks have agreed to swap pounds 180m of debt for equity.

The banks seem to love him (his appointment is regularly a sine qua non of their support) and he knows it. He exudes self-confidence. He is a marvellous presenter of his often complex deals. Likeable, quotable and forever involved with newsworthy companies, David James has received an almost universally flattering press.

But while the banks presumably think he is doing a good job, both Davies & Newman and Eagle Trust, a rag-bag mini-conglomerate, seem to have been blown far from the course which Mr James set for them when he took over.

He has found the going much tougher than he expected. In 1991, though D & N was heading for a pounds 35m loss, he spoke of an improving trend, and said that the company should make a pounds 20m profit this year. In the event, it will almost certainly make a loss. Eagle Trust is another case of promises postponed. Shortly after taking over as Eagle's chairman in September 1989, Mr James was holding out the prospect that shareholders might receive a return of a few pennies a share. This was to be achieved, in part, through a flotation of Eagle's best businesses, notably the Samuelson Group of television, lighting and film equipment companies.

Before long however, the timing of the Samuelson flotation had slipped, and is not now expected much before 1995. Meanwhile Eagle Trust has been through three financial reconstructions. The latest effectively capped shareholders' prospective return at 1p a share.

One big institutional investor, who describes Mr James as a superb accountant, suggests that 'maybe Davies & Newman was a step too far'. Mr James had no previous experience of the airline industry when he joined Dan-Air. 'Ultimately he was sandbagged by the inherent problems of that industry.'

Mr James disagrees. 'The thing that has gone wrong is the amount of passenger traffic in 1992,' he says. 'The biggest problem has been the fall-away in business traffic.'

The institutional shareholder says Eagle Trust was always 'a hopeless situation. He worked hard to achieve some stability, but the reality was there was never anything there for shareholders anyway.'

Brent Walker's Ken Scobie still thinks it too early to judge how company doctors have performed in this recession, as the fruits of their work are not apparent after six or 12 months.

'For as long as the recession goes on, a rescue gets more and more difficult,' he says. 'It gets more and more difficult to generate trading profits to service banks and other creditors, and to generate cash flow.'

But he adds: 'The relationship between the banks and company doctors has saved a lot of companies that would otherwise have gone under. Rescues have a marvellously beneficial impact - but I would say that, wouldn't I?'

(Photographs omitted)