Reader's Digest has gone into administration after talks between its US parent group and the UK pensions regulator over its UK pension fund broke down.

The negotiations concerned how to fund the firm's £125 million pension fund deficit. According to parent group the Reader's Digest Association (RDA), the pensions regulator rejected a rescue plan to settle the longstanding liability.

Administrators are now looking for investors interested in a potential business sale.

The RDA filed for bankruptcy protection last year after struggling with interest payments on a £1.4 billion debt, though it is about to emerge from the US equivalent of administration after a successful financial restructuring.

In a statement regarding the UK company's collapse, the US group confirmed: "The decision by the RDA UK board to place the UK company into an orderly insolvency process follows the recent decision by the UK pensions regulator that it would not support an agreement already reached between RDA UK, the trustees of its pension plan and the UK Pension Protection Fund to settle a longstanding pension plan liability."

The world-famous Reader's Digest magazine has just over 500,000 subscribers in the UK.

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It looks like January’s cold-snap has found another victim, in the shape of retail clothing chain Ethel Austin.

Some 3,700 jobs are at risk as a result of the firm’s fall into administration, along with its sister company, homeware retailer Au Naturale.

MCR is handling the administration of the chain and spokesperson, Geoff Bouchier, stated, "the joint administrators are trading the companies in administration in the short term with a view to finding a purchaser for the businesses as a going concern.”

He added, "we are reviewing the financial position of the companies and are, at this stage, unable to rule out store closures and redundancies.”

MCR said that the chain had suffered as a result of the snow that fell in January, keeping shoppers at home and out of the stores. MCR said this had a “big impact on sales.”

This is the second time in two years that the Ethel Austin chain has fallen into administration, the first occurring in April 2008. Then, the company was sold to MKOne founder Elaine McPherson. At the time of the sale, McPherson said she was going to return the clothing chain to its “former glory.”

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Administrators are seeking a buyer for a Cheshire paper business after failed efforts to keep the firm solvent.

Bridgewater Paper Company in Ellesmere Port, owned by Canadian firm AbitibiBowater, continues to operate while a buyer is found. It sells recycled paper produced in both the UK and Canada, employs 300 workers and is said to have an annual production capacity of 220,000 tonnes.

"We are continuing to trade the business as we explore all options, which include looking for a buyer for the business as a going concern," confirmed joint administrator Tom Jack from Ernst and Young.

"We are grateful for the support of all customers, employees and suppliers as we continue to satisfy customer demands."

The paper business for sale is believed to have traded at a loss for some time, leading its directors to conclude it could no longer meet its debts as they fell due.

In April last year, AbitibiBowter filed for creditor protection after US lenders turned down a proposed debt restructuring plan, announcing that it and its US and Canadian subsidiaries had filed voluntary petitions under US and Canadian bankruptcy codes.

The "merger of equals" of Abitibi-Consolidated and Bowater was completed in November 2007.

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The Rock, a £220 million development in Bury, Lancashire including 60 retail units, a cinema, restaurants, bowling alleys, 170 apartments and a car park, will now be completed by property giant Hammerson after Thornfield Ventures Limited was placed into administration.

A holding company of HBOS-backed developer Thornfield Properties, Thornfield Ventures' principal development asset was the 1.6m sq ft Rock, which is set for completion in the summer.

Phil Bowers and Angus Martin of Deloitte have been appointed joint administrators to the non-trading holding company, commenting that they are working closely with all stakeholders "to support the completion of Bury and maximise the potential" of other development schemes.

Bowers, a partner in Deloitte's reorganisation services practice, added: "It has been agreed by all parties that Hammerson, a leading European development and asset management partner, has been appointed to deliver the completion and opening of Bury and will also be supporting the joint administrators in evaluating the other schemes in the portfolio."

Major retailers including Marks and Spencer, Primark, Debenhams and Next are among those to have signed up for the Bury development, mooted for completion in July.

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The UK’s retail sector faces another “bloodbath” on the high street next year, according to insolvency specialists. They point to decreased spending and rising unemployment as reasons to expect a wave of administrations echoing the events of early 2009.

In spite of improving sales figures and a boost in sentiment, 86 per cent of insolvency practitioners polled by industry body R3 believe this year’s drop in spending will prompt the collapse of more retailers after Christmas.

Another factor singled out for the predicted disappearance of over 20 household names is creditors “biding their time” until after the peak trading period before they call in loans. January’s VAT increase is a further cause of pessimism for retailers.

“While it would be comforting to think that the worst of the downturn is over, it’s worth remembering that insolvency peaks after a recession ends,” remarked R3 president Peter Sargent. “We urge retailers to seek advice early when there is a better chance of rescue, rather than desperately clinging on, hoping that Christmas will cure all ills.”

In the opening months of 2009, around 22 high-street retail staples went into administration, including Woolworths, music outlet Zavvi, childrenswear chain Adams and tea and coffee merchant Whittard of Chelsea. For up-to-date information on businesses for sale and in administration take a look at our news section.

–>Latest retail businesses for sale.

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There has been a great deal of fuss in the press about the “pre-pack” administration process not giving a fair deal for the business’s creditors and accountancy firms benefiting in the form of high levels of fees. Despite many attempts by the industry to highlight the benefits of a “pre-pack administration”, it seems that the process is going to be looked at in detail by the Office of Fair Trading.

The investigation is aiming to look at fee levels and recovery rates, following concerns about what’s returned to creditors and how much the preservation of jobs in the insolvent business has cost. If the OFT finds against the larger accountants’ fee levels then it is likely there will be more work for the next tier of accountancy firms.

It looks as if the whole insolvency industry is going to have an interesting 2010. This is because business groups, such as the Forum of Private Business, have asked the OFT to delve into “phoenix companies” as well.

For those not familiar with the processes a “phoenix company” is simply a new company that has bought the assets of an insolvent company and carries on in the same trade as insolvent company, often with the same name and most, if not all, of the directors from the failed business.
Complaints against this process focus mainly around accusations that the assets of the failed company have been transferred out at below market price.

However, a “pre-pack” is a deal for the sale of an insolvent company’s business (and/or assets) which is put in place before the company goes into a formal insolvency process, usually administration. The deal for the sale of the business will usually have been worked out before the insolvency practitioner (IP) is formally appointed, and is then rapidly executed once the appointment is made.

The Office of Fair Trading’s senior director, Clive Maxwell, commented: ‘We want to identify any potential problems within the corporate insolvency market to ensure that firms and practitioners are competing freely and that the market is working well for the end consumers. Efficient insolvency services are an important component of a modern market economy.’

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According to latest figures released by KPMG this week, around half of MBO deals completed over the last three months have involved distressed companies.

The other interesting fact born out by the data is that average deal size has shrunk dramatically from the same period last year. The average MBO deal size over the past quarter was valued at £43 million, compared with £150 million in the third quarter of 2008.

However, senior KPMG partner, Michael McDonagh, said that he was surprised at the low number of distressed deals given how long the recession has had a grip on the UK economy. “The research shows that we are still some way off seeing the private equity market throw its weight behind distressed opportunities.”

KPMG’s view for the next year? McDonagh is betting there will be an increase in deals starting this final quarter of 2009, followed by a further increase in activity early next year.

And what kinds of companies are going to attract the most attention?
According to McDonagh, “What some might describe as dull but dependable businesses with good earnings visibility, particularly with contracted revenues, are far more likely to attract debt support and therefore private equity bidders.”

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Times are still tough for a lot of businesses. According to recent figures from The Insolvency Service, there were 5,055 liquidations in England and Wales in the second quarter of this year.

This was a 39.1% increase on the same period last year and a 2.9% increase on the first quarter of 2009. So the trend may be slowing but it is still a marked problem. In addition, the number of administrations, receiverships, and company voluntary agreements (1,529 in total) rose by 22.7 per cent on the same quarter last year. 1,027 of these were businesses in administration, slightly down from 1,311 in the first quarter.

So, while companies are still falling by the wayside like victims of a modern-day plague, in the ’survival of the fittest’ world of capitalism, this can represent an excellent opportunity for smarter entrepreneurs. For all businesses it is important to stay fit and lean in order to survive.

Drastically cutting costs is one way to stay afloat. But if you want to develop as an organisation, it is important to progress and be in a position to take opportunities as they arise.

And with so many struggling businesses out there, a failing business might represent an attractive investment opportunity. Businesses can fail for a number of reasons, not all of which mean the business cannot be saved as a going concern.

You really need to look under the bonnet to see what is going on. Incapable or tired management, insufficient knowledge or skill-base in the company, or overriding debts and stifling interest payments can bring a business to insolvency or the brink of insolvency, and all of these can be correctable by the right buyer.

For example, a start-up business could have a healthy and increasing turnover, but may fail due to a difficulty in raising capital.

Perhaps the owner is an ineffective manager, without the necessary skills to structure the business, the marketing skills to capitalise on sales opportunities or the discipline to manage inventory levels. An investor with sufficient financial resources and expertise could turn around such a company; and although capital is not exactly abundant at the moment, the cost of a deal is often a lot less now than it would have been just a couple of years ago. What is vital when considering such an investment is to be able to act quickly and carry out vigilant due diligence.

It is not just the balance sheet of the proposed acquisition that needs to be examined carefully. All financial records should be checked, plus anything else that is material to the sale. This means in essence that all aspects of the business need to be properly analysed.

Commercial due diligence should cover everything from operations to company strategy, and should include a comprehensive analysis of the company’s accounts, including past and forecast financial performance, a valuation of all property and other assets, major customer contracts, intellectual property protection, legal and tax compliance and any outstanding legal issues or action against the company.

In the past, vendor due diligence (VDD) was quite common. But it is a slight contradiction to rely on a report written by the vendor of the business you are buying. Best to do your own legwork.

And it cuts both ways. Vendors could also consider performing a due diligence analysis on the buyer, to review their ability to purchase, as well as reviewing other issues that could affect the business or the vendor following the sale.

Forced sellers are abundant at the moment and there are bargains to be had if you choose carefully and do your homework. Sectors that have been hardest hit, such as retail, hospitality and financial services, can offer good value. Now is not a time for the faint-hearted. If you have the confidence, the expertise, and of course the financial means to take opportunities as they arise, you could be a winner in the Darwinian game.

It is not down to chance that over half (52%) of the 50 top companies in the United States were started in a recession year. And of the top 10 companies, an astounding 8 of them were incorporated in a recession year. It is likely that the tough start-up environment in a recession forms a company culture that thrives by exploiting opportunities whenever and wherever they arise, and that includes buying business at their weakest point.

Of course none of this is easy. Finding the right acquisition can be a lengthy process, requiring a lot of time and effort. And there is risk involved. But the results speak for themselves. And when we do eventually emerge from this recession, it may be those who have had the entrepreneurial confidence during the hard times to take risk and effectively consolidate that ultimately come out on top.

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More than a third of management buyouts in the UK since the start of the year occurred at companies in administration, as private-equity firms target failed businesses. Private equity firms with cash and those less reliant on debt have been particularly successful in this regard.

Research on the first quarter of 2009 by the Centre for Management Buyout Research (CMBOR) shows companies in administration surpassed family-owned and closely held businesses as a source of management buyouts for the first time since CMBOR began gathering data in 2000.

Since the start of the year, of 61 management buyouts in which managers of a company bought the company they work for — usually with the help of private-equity funds — 38% involved companies in receivership. This compares with 11% for the whole of last year and 5% in 2007

These deals, which tended to be smaller in size, constituted 14% of all management-buyout deal value, which is £1.95 billion ($2.84 billion) so far this year. Although about half of management buyouts are private-equity backed, CMBOR said, these transactions make up the vast majority of total deal value.

Conversely, family-owned and closely held companies were the source of 28% of deals in the first quarter, compared with 42% last year and 41% in 2007. Secondary buyouts fell to just 7% from 19% last year.

Of the £1.95 billion in total value of the 61 UK management-buyout deals, two-thirds was from one deal: U.K. buyout house Permira Advisers LLP, News Corp. and NDS Group PLC taking television-technology company NDS private. It has been the slowest quarter by number of deals since records began in 1990.

In the final three months of 2008 there were 92 deals worth a total of £1.3 billion, and in the first quarter of last year there were 152 deals worth a total of £7.5 billion.

If the market continues at this pace it will be the slowest year by management buyout volume since 1981, when there were 152 deals worth a total value of £267 million. It would also be the slowest year by value of deals since 1995 when there were 598 deals worth a total of £5.6 billion.

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Peter Harkness (above) and his business partner, Owen Davies, bought Highbury Communications, the North London-based publisher of many well-known newsstand magazines out of administration in 2006. The businesses downfall occurred after it had taken on too much debt – some £26m. This debt was mainly due to some disastrous acquisitions and the overly ambitious launch of new media products.

How Peter Harkness and his partner turned the company around so that it is now making a profit of £1m is an interesting story. The main focus was to get rid of the loss making magazines and concentrate on the “special interest” magazines that have a more loyal subscriber base. Due to the increased profitability of these new titles only 30% of the revenue now comes from advertisers. Profitability was further increased with the setting up of ecommerce websites closely linked to the actual titles.

Another successful entrepreneur, Simon Elliot (above right), saw an opportunity when the company he was interested in collapsed due to a £1m tax bill. Problems that were uncovered included a finance director who had been stealing from the company due to lack of oversight. One of the main attractions of the company were the long term contracts.

Both Elliot and Harkness found their target companies through careful research. Harkness says he ‘used to spend hours and hours downloading files from Companies House’, and Elliot’s successful bid came after two previous potential mergers had fallen by the wayside. Of course another great source of information is the Business Sale Report, where companies that have gone into administration are listed on the site each day.

Stuart Wilde just just saw a business, liked it and just bought it. Stuart was in the middle of a home renovation project when he found out his favourite supplier had gone under. Stuart was relatively wealthy but at 52 he had ‘itchy feet’. He jumped at the chance to buy the company, even though he had no experience in bathrooms or in retail.
‘I did question my sanity for a couple of minutes,’ he says, ‘but I felt there was a good business there, and the main reason it had gone into administration was because the previous owners had spent £750,000 doing up the showroom without thinking about cashflow.’

So what have the entrepreneurs learnt from their experience. A number of key lessons seem to have been learnt.

A more detailed version of this article where readers can gain more insight can be found by subscribing to the Business Sale Report

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