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July 2005

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July 2005

Cover Story

Cover Story

        
        
				    
        

Turning the lights back on



Chris Thomas recently turned 50. But his own personal milestone was matched by more than a milestone or two in his business life too. In fact, while he was doubtless having a drink or two to mark the personal milestone, he arguably deserved the whole bottle for steering his wirings business Electrium to any kind of future at all.
Celebration, no. After all, almost 3,500 workers no longer have the jobs they once had because of the decisions Thomas has taken over the past five years. The vast majority have found new jobs, but that's not quite the point.
Satisfaction, well yes. What Thomas has done is ensure a future for some of the UK's great electrical brands.
Indeed, the point is made very early on in our interview at Electrium's gleaming new Cannock Lakeside headquarters beside the M6 Toll. Incidentally, it's a building you can hardly miss, being just about the most prominent office development so far built beside the motorway. As for the Electrium story - that's a story you easily could have missed given that the company has courted little or no publicity for virtually a decade since its original management buyout (MBO).
Returning to the point about the survival of the company's brands, the issue comes up when I ask Thomas quite bluntly why he stuck with it all: the stress, tension and sleepless nights of a massive restructuring that saw the closure of 13 UK factories and the simultaneous opening of manufacturing plants in the Far East.
"The answer is really quite simple as you've already said," confirms Thomas. "The brands. The brands we have are very old and there is a lot of goodwill, not to mention value, still attached to them. The brands remain the absolute key element of this business. But you cannot have brands unless you have a secure business and we have a secure company now."
The brands - Wylex, Crabtree and Volex - became part of the same family back in the early 1990s when industrial conglomerate Hanson gradually added them to its electrical wirings business.
At the time Thomas himself was already a high-flyer within Hanson. Ironically, he had earlier started his career as a graduate trainee within Crabtree Electrical Industries. But he didn't hang about. By the early 1990s, and still barely out of his 30s, he was running the expanded Hanson electrical division, which by then included Crabtree.
"It was a pretty ruthless organisation but I loved it," recalls Thomas. "It was also very entrepreneurial."
The latter point was perfectly illustrated when Hanson itself decided to focus on its aggregates and bricks divisions and put its electrical division up for sale in 1996.
Continues Thomas: "In some companies you would be fired for even suggesting a buyout. But I knew the potential of the business and they ended up letting me run an MBO."
The resulting £3135m buyout of Hanson Electrical backed by private equity group Cinven was one of the biggest deals anywhere in 1997. A syndicate of some eight banks headed by Royal Bank of Scotland and UBS ploughed into the deal.
But the masterplan Thomas had drawn up for the business was quickly derailed by outside forces.
"£3135m was a big deal in those days. Mid-cap companies were very much in vogue and the original plan had been to grow the business via acquisitions. We wanted to triple the size of the business and float it. That was where we were going. Then life became difficult," says Thomas.
Thomas himself admits that even at the time it was a brave move on Cinven's part to back the business. But neither he nor his equity partner could have quite imagined what was around the corner.
In short, two trends began to strike fear within the business: price deflation - primarily driven by Far East competition - and over capacity. "The rate of deflation was massive, we were chasing it down at such a pace," recalls Thomas.
That pace required an equally speedy response from the company on all fronts. The decision was taken to sell or close significant parts of the business.
As Thomas bluntly adds: "It was a case of saying we have to go to China and do it big scale. We have to take out all the factories and concentrate on the core business."
One of the most significant early moves within the context of the restructuring was Thomas's decision to sell industrial switchgear division Dorman Smith to Tyco, a division which at that time was turning over £335-40m. Crucially, the deal enabled Electrium to pay off all its bank debt, which would considerably ease the way several years later for a successful secondary buyout.
As finance director Niall Turnbull, a tall, commanding Scot who has joined us for the interview (and who himself was also part of the 1997 MBO team as a former finance director of Hanson's electrical division) recalls: "The Dorman sale and others left us focusing chiefly on the residential electrical equipment side and with a very focused business."
The restructuring continued apace. Virtually the company's entire UK manufacturing business was shut down and partnership agreements were struck with partners in China and India.
Adds Turnbull: "Our strategy ended up being an aggressive reduction of the UK cost base twinned with investing in our brands, sales and marketing. What has happened since on the commercial side is the complete opposite to the manufacturing side."
At the time of the first buyout Electrium employed 4,000 at 14 UK factories. By the time of its second it employed just 600 with one UK factory in Wythenshawe, Greater Manchester (retained so that it can readily customise orders from its UK sales which still account for the vast majority of turnover) and one distribution centre in Wigan. In a move of great symbolism, the last UK factory to close was the company's old head office in Brownhills with commercial staff moving across to the firm's new Cannock HQ this Spring. Only the week before our interview Thomas has finally handed over the Brownhills keys.
Says Turnbull: "As sales and profits have grown we have needed these bigger commercial offices to house the investment we were making. In fact, we are even in recruitment mode again now. Chris won't mind me saying that he became almost obsessed with ensuring that this move happened. It has also become very symbolic for us."
To open a new office must also have been a particularly pleasurable experience for Thomas after closing down so many others, although he did take great comfort from those many workers who accepted that he was faced with little choice.
Says Thomas: "It was a case of being very blunt with people, telling them that if this factory doesn't close in six months then we don't have a business left at all. Ensuring that our workforce found other work was crucial. We got people in through the door, held job workshops and helped them write their CVs.
"The worst result we got was where only 85 per cent of workers at one factory found other jobs." And, adding with a wry smile, "that was at the factory in Scotland where nearby Motorola had just shut down."
Clearly the greatest challenge for the business has been the relocation of its manufacturing facilities. As Thomas remarks in a world of understatement: "It was a very difficult balancing act, going down from 14 factories to one. It has been a very difficult road."
Electrium now has three factories in the Far East, two in China in Shenzhen and Shanghai, and one in New Delhi, India. But unlike the many British manufacturers who are now rushing to the Far East market, Electrium built on relationships that it had been developing in the Far East for several years. Thomas himself saw both the great threats and opportunities of the Far East back in the early 1990s on frequent visits during his Hanson days and developed the necessary contacts book.
Electrium does not own the factories in the Far East, instead it has entered into partnership agreements with partners which it refuses to name for competition purposes. Adds Turnbull: "Our partners control the manufacturing but we tell them the volume, agree the price and control the quality and technical side."
Turnbull says that the Far East factories have really raised their game. "It has taken three or four years to get there though," he adds. Butts in Thomas: "I really shouldn't say this but the quality is almost better now than what we were churning out in the UK."
Against such a backdrop, any outsider would have probably viewed Thomas and Turnbull mad to then consider a major corporate restructure. But events were out of their hands.
Cinven had moved up to the mega-deal sphere and by 2002 was keen to dispose of its last mid-market investment. So Electrium was put up for sale in January 2003.
Despite the restructuring within the business Turnbull says there was quite a lot of initial trade interest. "The only problem was that would-be buyers then saw that we were only 60 per cent through our restructuring programme. People tended to focus on those issues rather than see the longer term prospects. When they did their due diligence they looked at things negatively. People were not getting underneath the numbers and seeing that we were growing sales. Underneath there were massive changes going on. Trying to get people to grasp that was difficult."
As a trade sale became less likely, Thomas and his team decided to have a stab. Adds Turnbull: "We approached Cinven in September 2003 to see what we could package together and we had a number of venture capital (VC) partners behind us. As far as we were concerned it was an unfinished job. Underneath we could see the business growing and wanted to complete the job we started in 2000."
In the event it was LDC and director Martin Draper that got "underneath the numbers" and spent a lot of time understanding what was happening in the business. The deal, backed by Royal Bank of Scotland again (and also handled in Birmingham with law firms Browne Jacobson and Wragge & Co joining accountants Ernst & Young and Deloitte) was struck.
Even so, right at the end of the secondary buyout process another trade buyer was waiting in the wings. Recalls Thomas, with a glint in the eye: "We had exclusivity until 19 December and we ended up doing the deal on the 20th. In truth we were not offering anything like what trade buyers had been offering. But we were able to complete very quickly."
Since the buyout it's been all heads down as management complete the restructuring. But now the turnaround is complete and every ounce of focus is on growing existing markets, developing new product ranges and growing the business further in terms of geographic spread.
A new look board has also added extra zest. In particular, the recruitment of Nick Brayshaw, former chief executive of automotive supplier Wagon, is seen as a real coup (see panel p17).
Meanwhile, the public sector remains a key plank of Electrium's growth, while it also has a big eye on new industrial markets too.
Thomas is also upbeat about the UK economy and says the general economic climate has helped him: "We are now seeing much improved UK trading conditions. We can actually put in price increases now. We are also growing our market share. The pound/dollar rate has been favourable to us too. Competition is still tough but we have concentrated heavily on our brands and it is paying off."
The figures bear it out too. Electrium has just reported its first profit to Companies House in seven years (of £35.4m) Says Turnbull: "Over the last six years the numbers have always been clouded by all our restructuring costs. I'll be framing these accounts."
Sales are strongly going in the right direction too. In two years sales have risen from £362.4m to £374.5m in the year to March 2005.
But Thomas will not jump into markets for the sake of it. "Home automation is often talked of as the next big thing. But every builder you speak to says it is still too expensive. Automation will happen but it is still a way off yet."
Being the experienced deal-doer that he is, Thomas continues to have one eye, like his VC backers, on the exit strategy. He has been around the block enough to know all the answers: "Trade sale, refinancing or AIM float," he trots out. "At this stage I really couldn't say which it will be, although the latter is perhaps most likely."

Also in: July 2005

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