DEALTALK - Company rescues need doctors, not engineers

By Simon Meads and Tom Freke

LONDON (Reuters) - Private equity firms specialising in turning around ailing companies are preparing to strike a series of deals based more on operational improvement than balance-sheet fixes.

With European banks and, to a lesser extent companies, readying a wave of disposals of battered companies, a new phase of restructuring will call on acquirers with a wide set of skills.

"Faced with the new reality, private equity has been building its access to turnaround skills, on the basis that the only option is to repair the underlying asset -- the business," said Christine Elliott, chief executive of the Institute for Turnaround (IFT), the professional body for company doctors.

The best solutions are achieved when operational and financial work goes hand-in-hand, she added.

Firms such as Oaktree Capital, HIG Capital and Apollo Management have sold themselves on their ability to deal with difficult situations.

Some of these specialist investors doubt the ability of mainstream private equity to take on the dirty work of restructuring companies.

"There's a bunch of guys who have resprayed themselves as restructuring, but to my mind, you really have to have the right skills," said Paul Canning, managing director at HIG.

BANK SALES

Banks have been waiting for the economy to recover and the value of their holdings to rise before selling many of the stakes they have taken from former equity owners.

This week HSBC took a 47 percent stake in Jessops after the British photographic retailer ran into financial difficulties. And bondholders took over Germany's Treofan, a producer of plastic films, as part of a restructuring deal.

Calls for cash injections at the businesses they now own will force lenders to make decisions on which companies to back themselves, and which they will offload.

"My view, and the consensus view, is (bank sales) have to accelerate," said Nick Jones of Clearwater Corporate Finance.

Clearwater advised on the sale of book seller Borders to Valco, a division of turnaround firm Hilco, a deal pressured by the deleveraging needs of the company's lender Landsbanki.

The sooner investors can get into these businesses, the more likely they can set them on the right track, said HIG's Canning.

"We are trying to tell banks to let us in a bit earlier -- the earlier (we get in) the better we can start moving the business forward," said Canning.

SPIN-OFFS

While banks will provide the lion's share of operational restructuring deals, specialist investors are also looking to take on businesses no longer wanted by big corporates, said Nick Morrill, managing director at Rutland Partners.

"We are very busy with turnaround opportunities that are privately owned or are considered to be businesses that are non-strategic in the groups they are in," Morrill said.

In July Rutland acquired CeDo, an own-label producer of bin liners and clingfilm, from German conglomerate Delton AG.

"I undoubtedly see more activity as corporates begin to refocus, tighten up their balance sheets and spin off bits and pieces," said HIG's Canning.

With a big increase in demand for company rescues, the IFT's Elliott said the British government's recent proposals to change insolvency laws was a "missed opportunity" to encourage a rescue culture in the UK.

"The suggestions are the wrong place to start -- there is a need to focus on company rescue and recovery rather than insolvency processes."

(editing by Rupert Winchester)

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