MFI sells 200 stores for £1 and reinvents itself as Galiform

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The Independent Online

MFI is paying up to £74m to get rid of its loss-making retail arm but the sum is less than investors feared and shares in the group, which is being reinvented as a builders' supplier, leapt 13 per cent.

The 200-store retail chain, which brought flatpack furniture to the high street, is being sold for a symbolic £1 to Merchant Equity Partners (MEP), a new private-equity group set up by a former Deutsche banker.

The complex deal is costing MFI, which plans to change its name to Galiform, £10m in bankers' fees and will force it to take a £180m hit to its balance sheet. Its shares rose 11.5p to 99p because analysts had feared the disposal would cost the group more. The kitchen-to-bedroom chain, which will be run by Gary Favell as chief executive, is getting a £136m cash injection from its purchaser and its former owner to help it stay afloat. It has struggled for the past three years after botching the introduction of a new supply chain and IT system, racking up operating losses of £49m last year.

Compounding MFI's woes, fewer homeowners are willing to fit their own kitchens, with many preferring to pay a builder. That helps to explain the success of Howden Joinery, MFI's trade business, which was founded in 1995 by Matthew Ingle, who succeeded John Hancock as chief executive last year. The new Galiform will comprise Howden's and its manufacturing business.

Should MEP succeed in resuscitating MFI, the new Galiform will benefit from any upside, receiving up to 25 per cent of any proceeds if MFI is sold or re-listed in a deal valuing it at more than £300m within the next five years. Conversely, should MFI remain a retail disaster, Galiform could be stung for £30m of shop leases on which it is the parental guarantor. It is also retaining MFI's pension deficit.

Mr Ingle intends to accelerate Howden's expansion, turning the 360-strong chain into an estate of more than 500 depots. He intends to open 60 outlets in 2007 and least 40 in each successive year. "The synergies perceived in the past between the two businesses were evaporating. Neither could flourish but now both are on the right footing," he said.

On top of the £74m the group has offered to pay MEP to offload MFI, it is transferring £52m of customers' deposits for goods ordered since August. It warned that any upside from getting rid of MFI would be wiped out by higher central costs and losses from its Sofa Workshop business, which it has also sold.

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