As we have discussed in previous blogs, over the last few years the UK economy has been plagued with an army of companies that had taken on large debts during the good years and were then forced to enter a corporate underworld when the credit crunch hit. We called these companies ‘Zombie’ companies, who are usually the result of restricted revenue and cashflow problems.
Comparing like for like, the number of Zombie’s in 2009 was 109,383, but by October last year that number had increased to 339,000.
Any available cash flow was being taken by the banks
For these companies, the normal, day-to-day corporate development was shelved and any cash generated was quickly vacuumed up by banks, sucking the life out of the company. At the time this was a huge worry for the economy as it was thought that the Zombie bubble would eventually burst unleashing an apocalypse that would slow Britain’s recovery.
Some of the country’s biggest household names were plagued with this affliction; Travelodge, Yell, Fitness First and Punch Taverns.
One of the most prominent shufflers was Premier Foods. It had entered into the credit crunch with a large amount of debts amassed when the trading was good as it attempted to build itself as a giant food supplier, buying a number of well known brands funded by cheap loans from the city.
In 2011 the company put out an exceedingly bad trading update. The shock announcement prompted a 40 per cent collapse in its share price and raised questions about the company's future. Sales were beginning to fall and for a stock that peaked at 287p in early 2007, it fell to as low as 6p. The blame was put on British consumers who had tightened their belts, and the ongoing supermarket price wars.
Zombie companies are now showing signs of revival
However, seven years later, the owner of some of the largest household brands, Mr Kipling, Batchelors and Bisto, is showing signs of revival.
So what are its vital signs? The company has recently posted a modest 2.4% rise in sales, hardly breath-taking but this is the first rise in turnover for two years. The notable figure is the turnaround of its operating profit, now at £23.3m against the loss of £12.8m posted last year.
Is this a sign of the economy improving as a whole or has Premier Foods been busy over the last few years solving their problems? It turns out that hard work has been at play here, the company appears to be coming out of a protracted and painful restructuring.
Prior to the crunch the writing was clearly on the wall for Premier Foods, it was in the hands of its banks and with debts amassed of £2bn it was in immense trouble. In the background the company had started to work on a cure and as a first step, the balance sheet needed fixing quickly. To do this a number of businesses were sold to raise the much needed cash. Brands such as Hartley’s Jam, Sun-Pat Peanut Butter, Branston and Sarson's were unloaded with Hovis being moved into a joint venture.
Shareholders stuck their hands in their pockets on no less than three occasions and some impressive negotiations took place to replace the company’s 28 lenders with a panel of just seven.
Debt is being paid by cash and profits are being made
As the company is now making profits it is able to repay its debt using cash. The company’s debts have been reduced to £585m and this is expected to drop by another £50m in the second half of the year.
Unfortunately, the restructuring has meant that sacrifices have needed to be made, not only has the company been required to lose some of its brands it has also needed to make job losses with thousands of jobs being cut.
Whilst a boost in the economy for companies such as Premier Foods is needed to return it back to profitability it doesn’t seem to be as a result of the change in economy which could affect other Zombie companies. This turnaround has needed a lot hard work to achieve and luckily it had significant assets able to be sold to release cash quickly, an option not available to most companies in a similar position.
Zombie companies are usually viable businesses. What is need is a change in the hand to mouth scenario it finds itself in. We have helped several Zombie companies back to life with our range of cashflow solutions – call us today on 01489 550 440 to discuss your options.