The Thing Is: Powerhouse - Lights go out at electrical retailer as its assets are short-circuited

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The Independent Online

Unlike the recession in the early-1990s, the current economic slowdown has had few major corporate collapses. That changed last week with the receivership of electrical retailer Powerhouse.

Although the third largest in the UK, it was hardly a powerhouse of its industry. Its £400m sales last year pale into insignificance against Comet's £1.4bn or Dixons' £5.7bn.

Powerhouse was pulled together from the ailing retail arms of UK electricity suppliers by Hanson, the industrial group, which closed more than half of the 300 stores in 1995.

Then Barclays Private Equity invested alongside the management in a buyout. The group bought up more stores to take the total to 230 outlets in 1999. With pre-tax profits of around £6.3m that year, the future looked bright, but the investment didn't live up to expectations.

It was announced last week that 93 stores would be shut, 800 jobs lost and the rest of the business put on the block as the company went into administrative receivership. This added to the miserable news that the UK's largest carpet manufacturer, Carpets International, and the largest milk processing plant, United Milk, plus the technology company Vocalis, had all suffered the same fate. The plug was pulled at Powerhouse when one of the credit insurers said it would no longer insure suppliers for the goods they deliver to the stores. This immediately put the wind up the suppliers, which were reluctant to give goods to a company if they might not get paid.

However, company insiders indicate it has been having difficulties for some time. It had an overdraft with Lloyds TSB bank, which had started asking for repayment and was eventually paid earlier this month. Cashflow problems meant that the company was looking for other ways to bring in money and to make up for a poor trading performance at the start of the year.

The easiest thing to sell was the extended warranties business. Electrical retailers' most lucrative business is selling customers an extended period of guarantee for the goods they are buying. It makes up for the very slim margins on electrical goods such as fridges and TVs.

Rivals such as Dixons have revealed that a huge chunk of their profits are made from the business. Powerhouse therefore found a buyer for its extended warranty business, a third party insurer based in the Isle of Man. The sum involved is believed to be £9.5m.

This might look to be a poor deal for the insurer now the business is in peril. But it is understood that it took some of the business's assets as collateral - although details of the offshore company are hard to come by. Another creditor, trade finance group Burdale Financial, did a similar thing when it lent money to Powerhouse recently. The extra rights to the assets indicate that both realised the predicament Powerhouse was in. With rights over these assets, they have a large bet on what return they will get.

But as it was Burdale that applied for the receivers to be appointed - with the support of most other creditors - it must be happy for the gamble to be played out. Now the fortunes of company and creditors are in the hands of the receiver - Deloitte & Touche's Nick Dargan, famous for dealing with the collapse of multichannel TV service ITV Digital.

The most money will be raised if the businesses can be sold while still trading. Currys, part of Dixons Group, already says it is talking to the receivers. But it could just be interested in buying up stock, hiring staff or buying the odd store or two. The same applies for Kesa Electricals, the newly floated business that owns Comet and some European electrical retailers.

It is thought to be unlikely that either will put in an outright bid for the company, as many of their stores are near to the main competitors' own. Both companies' shares have risen this week as investors anticipate many of the stores' local rivals will no longer be in action. Private equity firms might be put off by the complicated situation and the lack of freehold property. However, the Powerhouse chief executive, Derrick Broomfield, was ebulliently optimistic last week about the future of the company, and some investors might feel like taking his word about a turnaround.

Otherwise, the businesses would be folded with the loss of up to 800 jobs. There would be a sale of the electrical goods on stock, the leaseholds on the building and the shop fittings could be sold bit by bit, which would not bring in as much money, and more staff would be made redundant. The last person in Powerhouse really would have to turn out the lights.