Gordon Brothers Opens New Office in Spain

Article

Alvaro Cobo, Managing Director, Spain & Portugal was interviewed by Capital & Corporate magazine.

Date February 2020

Originally published in Capital & Corporate

Gordon Brothers has opened a new office in the heart of Madrid, headed up by Álvaro Cobo, after managing the disposal of €60M in retail inventory in Spain in 2019 and successfully working with PE-owned companies including Grupo Gallardo Balboa (KKR), Douglas (CVC) and Merkal (OpCapita). After Stone Point Capital entered its share capital in 2018, the firm has strengthened its business and team in Iberia, increasing its footprint in the industrial sector and enhancing its capacity to invest in special situations. Its approach focuses on maximising the value of assets, largely overlooked in M&A deals, despite the fact that an exhaustive revision of their underlying value has a direct impact on both the price and cash flows of companies.

Capital & Corporate: Established in Boston in 1903, Gordon Brothers offers an innovative range of services in Spain with a focus on assets in special situations. Which assets do you work with?

Alvaro: Our work is structured around three key asset classes –industrial plant and equipment, retail inventory and consumer brands – where we provide capital and services to companies so that they have enough liquidity to recover and maximise the value of their assets. In short, we value, dispose, invest and finance assets. We work with financially stressed companies, such as companies in special situations or going through transformation, and we also work with distressed companies that are restructuring, in need of refinancing or going through insolvency proceedings.

Capital & Corporate: After more than a century as a family-run company, in 2018 Stone Point Capital took a majority stake in Gordon Brothers... In what way is the US fund driving the firm forward?

Alvaro: The deal marked a significant milestone. Although we can invest up to USD 450m on our balance sheet, Stone Point Capitals USD 19 billion private equity fund has further bolstered our balance sheet, while we continue to spearhead the firm’s management. We are investing capital in new business areas and projects and driving the geographical expansion of Gordon Brothers which, in Europe, is growing outside the UK. This is one of the reasons why we have opened an office in Spain. Until now, the firm’s long-standing business was retail, where we are a global leader in the valuation, disposal and financing of stock for major companies around the world. In Europe, for example, recent projects we have worked on include the exit of Hudson’s Bay from the Netherlands and the closures of Mothercare and Links of London in the UK. At present, the major growing business area is the industrial segment, i.e., any sector with a high volume of non-real estate fixed assets, where we are extremely active in Europe in the pharma, automotive, machine construction, steel, printing or cable manufacturing industries.

Capital & Corporate: How has the deal flow evolved since you began to operate in Spain in 2013? In 2019, you worked in the retail segment with companies owned by various private equity funds.

Alvaro: Spain and Portugal are certainly key countries in our international growth strategy. Over the years, Gordon Brothers has maintained a significant focus on retail in Spain, working successfully for clients such as Eroski, Sonae, Douglas and Merkal. Dialogue with private equity funds is straightforward and fluid because they can quickly see the positive financial impact of our work. In companies such as Douglas and Merkal, which are owned by CVC and OpCapita respectively, we have worked on projects to reduce and dispose of surplus stock in warehouses via the stores themselves, helping to convert an underperforming asset into significant liquidity, with a positive impact on the current business thanks to the increase in footfall in stores.

Capital & Corporate: The retail sector continues to be key for Gordon Brothers... is this why you hired the former CEO of Cortefield and El Ganso, Berta Escudero, as the Managing Director for Retail at the group?

Alvaro: Yes exactly. In 2019, for example, we managed the disposal of €60M in retail inventory in Spain. On top of that, we strengthened our strategic focus on Spain and Portugal, rolling out our other business areas in Iberia: industrial, appraisals and investment in special situations. Therefore, aside from our work in the retail space, we also executed projects to support KKR in Grupo Gallardo Balboa, appraising several plants belonging to the steelmaker group in Spain. We also supported a pool of Spanish banks in the refinancing of a fashion distributor, and we have an interesting range of special situations investment deals in the pipeline. Our goal is to invest around €20M in two or three deals over 2020 in Spain.

Capital & Corporate: You carry out thousands of valuations a year around the world and in a range of sectors... Do you advise on the best divestment strategy as well as on the price?

Alvaro: That’s right, every year we receive several thousand appraisal mandates around the world and we value on average 35,000 assets. A significant portion of our appraisals are carried out on behalf of banks, asset-based lenders and financial investors. We devote a lot of time and effort to asset valuation, as it lies at the core of our business. We strive to understand the prices and reality of the market. For example, we have the world’s largest in-house database of used machinery sale prices. In fact, all our projects require an asset appraisal service, either because the project is in itself an asset valuation or because we have to carry out a prior appraisal in order to invest in or sell assets. Our valuation approach is always NOLV (Net Orderly Liquidation Value) with a limited sale period. In other words, the value that can actually be fetched in the market through the sale of the asset; it is always a value that we can guarantee and is accompanied by a liquidation strategy. This is crucial. In asset valuation or when we manage a disposition, we are willing to leverage our balance sheet to ensure minimum threshold values. This is what sets us apart from every other appraisal firm.

Capital & Corporate: Are you also supporting banks in their refinancing, insolvency or even bankruptcy processes?

Alvaro: Yes. We are seeing lots of refinancing scenarios in which banks are reluctant to increase their exposure and where we can help by conducting appraisals, managing dispositions to structure refinancing tranches and, eventually, providing capital with structures based on valuable machinery, inventory or brands. We’re able to lend a great deal of support in refinancing processes where a distressed asset is involved, in negotiation processes between banks and companies to determine the best solution in regard to asset disposition, and how this would affect the refinancing agreement.

Capital & Corporate: Within the framework of a corporate transaction, can a lot of underlying value be generated by disposing of retail inventory or equipment?

Alvaro: Of course. The focus tends to be placed on EBITDA or debt in many M&A deals, as opposed to the assets, which are greatly overlooked. However, the truth is that many companies have surplus assets whose value is not reflected in the acquisition price. There are numerous occasions when the underlying value is not accounted for in the sale price or is not converted into liquidity for the companies. In the end, funds tend to focus on the profit and loss account and EBITDA. For more traditional private equity firms, the return will continue to be sourced mainly from EBITDA growth and expansion of multiples, but the realisation of underperforming assets is an additional source of profitability, both from the sale and from the scaling back of costs associated with its maintenance. Our recent projects at Douglas and Merkal are two good examples. We can provide value to these processes either by managing the disposition of these assets or by acquiring them ourselves. Plus, in the restructuring of balance sheets, it is possible to establish the debt refinancing tranches with repayment terms linked to the divestment of certain assets, machinery or stock.

KEY PROJECTS IN 2019 IN EUROPE AND SPAIN

  • In Spain, reduction and disposition of surplus inventory in warehouses for Douglas (owned by CVC) and Merkal (OpCapita). For KKR, appraisal of several plants owned by Grupo Gallardo Balboa.
  • In Europe, closure and disposal of inventory owned by both Mothercare and Links of London –jewellery subsidiary of Folli Follie– as well as the exit of Hudson’s Bay from the Netherlands.