BWG deal with South African business gives Spar owner stability

Does anyone know the Afrikaans for a breakfast roll? BWG, the company behind the Spar chain that has fed a generation of hungry Irish builders, has sold an 80 per cent stake for €55 million to Spar South Africa (SSA).

The deal represents a major turning point in what has been an eight-year rollercoaster ride for BWG’s management team, who bought it in 2006 for about €390 million at the height of the boom.

One disastrous real estate crash and two debt-restructurings later, its management, led by Leo Crawford, has finally right-sized BWG's balance sheet and freed it from the nightmare of its inflated property borrowings, which overshadowed its otherwise profitable retail operations.

After two years of financial surgery, BWG has emerged with debts reduced from €300 million to €130 million and under the wing of a powerful international retail group with the financial clout to make waves in the Irish market.

What does this mean for the group – which was founded in the 1970s and was once part of Irish Distillers – and also for the Irish convenience store sector?

For Crawford and his team, the deal is hugely significant. They may have sold a majority stake, but they appear to have bought long-term stability.

After they purchased BWG from Electra Partners in a highly leveraged deal just as the property market peaked, the prognosis for yet another debt- laden Irish business in a rapidly declining market seemed poor.

The owner of the Spar, Mace and XL brands, with more than 900 Irish stores, first stabilised its retail operations at sales of about €1.2 billion, €1 billion of which comes from the wholesaling division that supplies its store franchisees.

Property debts The modest underlying profitability of its core activities was, however, obliterated by the weight of its property debts. Most of the loans Crawford and his fellow shareholders used to buy out Electra were due for repayment at the end of last year.

In 2012, BWG started the process of balance-sheet rebuilding by refinancing one such facility with AIB, which also freed up cash for a new €20 million distribution facility in west Dublin.

All the while, it was also locked in background negotiations with a five-bank consortium for a complete refinancing of its €300 million debts.

It finalised that transaction in November, just weeks before an end of year deadline. AIB, Bank of Ireland, Lloyds, Ulster Bank and Blackstone wiped a third of BWG's property borrowings as part of the deal.

In return, Crawford and his fellow shareholders gave warrants – similar to an option to purchase shares – over 75 per cent of its equity to the banks.

With the return of an international appetite for Irish assets, together with the nascent revival in the Irish retail market, management sensed another opportunity to compound the gains of the November restructuring. Advised by Investec, in March they approached SSA, which has no debts to speak of, about the possibility of an investment.

The €55 million SSA paid for an 80 per cent stake appears, on the face of it, to possibly undervalue a major Irish retail business. The cash will be used, however, to take out about €70 million of debt held by Lloyds and Ulster, and also to buy out the warrants held by the remaining institutions.

In a single stroke, BWG has thrown off the yoke of the banks as far as its equity goes, replacing them with a powerful international retailing group.

Enterprise value With remaining debts of €130 million, the deal gives BWG an enterprise value of close to €190 million. Crawford and his fellow shareholders also have a guaranteed buyer for their remaining 20 per cent in five to eight years.

For the market, the deal means fresh ideas and a new competitive threat. SSA plans to help BWG migrate some of its smaller convenience stores to larger-format operations. SuperValu take note. BWG will also embark upon a €100 million, five-year expansion of its operations, partially funded by cash from SSA.

It isn’t just Breakfast Roll Man who will have something to chew over.