Venture capital the loser as Bell founders

IT IS ironic that this is the year when the management team at Bell Lines should have been celebrating. Instead the company, which the team had backed for almost four years, is in examinership.

In 1993, funded mainly by venture capitalists and Irish Continental Group (ICG), the team organised a management buyout of Bell and their cloud then appeared to have a silver lining. The fruits were to come in 1997 when ICG had an option to buy out all the other shareholders at market value. Now the value of their investment has evaporated.

The biggest potential losers, however, will not be the management but the venture capitalists. While Bell Lines is in examinership, so also is the parent company, Bell Freight Transport Group (BFTG), which was used to effect the takeover in 1993.

That was almost exclusively financed by £8.4 million of subordinated loan stock with a coupon of 10 per cent. The loan stock is held by NatWest Ventures Investments, CVC Capital Partners and ICG. The equity is just £400,000, with 30 per cent held by each of the venture capitalists, 25 per cent by ICG and 15 per cent by the management.

The loan stock had been serviced out of Bell's dividend income. However that is understood to have stopped last year, which was a prelude of worse to come. With BFTG and Bell in examinership, a restructuring is likely to result in the loan stock being written off. And as Bell badly needs an equity injection (together with an arrangement with its creditors and banks), the value of the equity will be severely diluted.

The examinerships, announced last week, should surprise no one. When ICG announced that it had written off the carrying interest of its 25 per cent stake in Bell, the die was cast. There were hopes that restructuring talks, involving creditors, banks and shareholders, could have been successfully completed, and an examinership avoided. But all it takes is for one ultra nervous participant and that is enough to put it over the edge.

It came in the form of some of the banks reducing their facilities. Coming at a time when the company traditionally loses money, and with the absence of further working capital, it had no alternative but to try the examinership route.

So what are the chances of a successful outcome? The most worrying is the extent of last year's losses. Amounting to over £6 million, they wiped out all the profits generated in the previous five years. But in its favour it is not insolvent in balance sheet terms as it has an £8 million surplus of assets over liabilities. However, with liquidity drying up, it was rapidly moving into a position where it would not have been able to pay its debts as they fell due.

With so many imponderables, it is hard to place a value on Bell now. The MBO placed a value of £21 million on the company in 1993 when it was purchased by the newly formed BFTG, from the Rotterdam based HES Beheer NV company. Another part of the consideration involved the assumption of debts of £11.2 million.

Part of the consideration came from the sale of surplus property assets of Bell amounting to £1.5 million and on top of that there was a deferred payment of £1.25 million in 1998. There must now be serious question marks over that deferred payment.

The introduction of new venture capitalists and/or the existing ones cannot be ruled out in a new restructuring. But given the experience of NatWest Venture Investments and CVC Capital Partners, it could prove very difficult.

Bell's non bank creditors are owed around £20 million. On top of that some £20 million is owed to banks and other financial groups. For a restructuring to work, they would have to agree to a partial writedown of what they are owed. And there would also have to be an equity injection.

Nevertheless, Bell Lines has been a profitable, though cyclical, company. It has been hit on two fronts: first, the damage to two cranes in Waterford; second, severe competition from the shuttle in the Channel Tunnel. The first is non recurring but it has to make up for the loss of trade. The perception on the second will be all important in any restructuring.

A lot is at stake, not only for the shareholders and bankers, but also for the 161 Irish employees (it has a total employment of 636) and the 103 Irish hauliers many of whom who deal exclusively with Bell Lines and who could face ruin if restructuring does not work.