The Dealmaker, by Guy Hands

Guy Hands (born in 1959) is an English investor, who worked at Goldman Sachs as a trader, created Nomura’s Principal Finance Group (PFG) in 1994, spun off in 2002 to create Terra Firma, one of the top 10 global private equity firms at the time, and now runs the Hands Family Office.

The Dealmaker tells the story of his struggling youth, his spectacular professional success, his tragic downfall (due to a concentrated bet on music major EMI), and his rebirth. The book contains valuable lessons on the do’s and don’ts in private equity and detailed case study materials.

Below are the lessons shared by the author throughout the book, rearranged by theme:

The LBO playbook

• Doing a leveraged buyout is much like buying a house, except that you are using a company as collateral for the loan and you need to ensure that you are borrowing from banks at a cost lower than the return on the deal you expect.
• There are five ways private equity can increase value:
  • Buying well. The lower the purchase price, the higher the returns of course. But in competitive auctions, being the lowest bidder will cost you the deal, so you need to find ways of being able to pay more than competitors while still turning a decent profit, which is where uncovering more value comes helpful.
  • Borrowing. If the cost of debt is lower than the yield on the business, you can increase your returns by borrowing.
  • Operational improvements. You can make improvements by increasing sales (e.g., adapting the offering, merchandising display or atmosphere of venues to potential customer tastes), increasing margin or cutting costs (e.g., strict spending controls, redesign and retendering, achieving scale to get discounts on purchasing). The author sought to achieve operational improvements of 4% a year for the first 5 years.
  • Acquisitions. A business made larger with acquisitions may warrant a higher exit multiple, as it would be deemed safer. With the Unique Pub Company, the author opted for expansion via M&A. By the time of exit the group controled 3,200 pubs, and the resulting market share commanded a premium.
  • Repositioning. You might (1) change the business’s profile by getting rid of its riskier parts to make the remainder safer or (2) find ways to explain cash flows more transparently to give potential buyers more confidence in the numbers. If done right, this will also achieve a higher exit multiple. With AT&T Capital, the group went from a collection of 20 businesses across several industries to 2 businesses centered on leasing, the others being sold or closed. The remaining company was leaner, more focused, and far more attractive.
• Several enablers can help achieve this:
  • Relationships. A good relationship with trusted investment bankers is essential. At Nomura and Terra Firma, the author involved Citi in 70% of his deals. He developed a trusted relationship with two people there, who provided key information and access to the highest echelons of the bank when needed. Note that this trust was later betrayed during the EMI debacle. The author also owes his success to the relationships he developed with senior executives, such as the Chairman and CEO of Grand Metropolitan for several of his pub deals.
  • Different lenses. Seek value where others don’t see it. When looking at Angel Trains, the author realized that other bidders were looking at the deal as a management buyout, focusing on the amount of bank debt lent against the equity put up (normally 2/3). He and his team approached matters differently, by borrowing against the cash flows of the business, which enabled them to outbid competitors while getting all their equity out shortly after the deal.
  • Granular due diligence. To secure senior executives’ backing for his first deal at Nomura (Phoenix Inns, a group of pubs), the author took them on a tour of the London pub scene. This field work enabled him to gain firsthand knowledge of the pub market, understand the locations and clientele of each pub (color coding then), review every aspect of his business plan, and find ways to maximize their value. Since then, every deal that has gone well for him involved his team conducting extremely granular site-by-site, customer-by-customer, product-by-product due diligence.
  • Number-crunching. At Nomura, the author set up a “Cyber Room” with intelligent, analytical, quantitative mathematicians (“quants”) who provided information to make the most of the five value creation levers. At Terra Firma, he also hired analysts with strong number-crunching skills.
  • Securing internal buy-in: Nemawashi is an informal process used in Japan when arguing for a new project. If people find out about an idea in a big meeting, they feel sidelined and are more likely to vote against the plan. If you gently seek their buy-in from an early stage, by talking to everyone involved (from the most junior to the most senior), you are more likely to win their support. It is a good but time-consuming way of achieving consensus. To help convince his Japanese colleagues at Nomura to invest in a pub franchise, he took them on a tour of hundreds of pubs so they could see the potential for themselves.
  • Staying power. It doesn’t matter how good your cards are if you don’t have enough money to stay in the game. Failure to secure financing on sustainable terms on EMI ultimately cost the author control of the company.
  • Knowing when to walk out. While at Nomura, the author and his bosses were initially excited by the potential acquisition of the Millenium Dome. The idea was to invest in what would become a large urban entertainment resort. His team ultimately won the bid, but had yet to finalize due diligence and negotiate final terms. In the meantime, things turned sour: the mayor of London refused to grant the permission for the necessary car and coach parking, the visitor numbers projected by the upbeat CEO (dubbed as the savior of Disneyland Paris) seemed too optimistic, IP ownership of the attractions was unclear, contracts with suppliers were numerous and disparate, and financial reports were withheld. Faced with this new information, and despite significant pressure from the government and from his Tokyo bosses, the author decided to walk away from the deal. This ultimately contributed to him leaving Nomura. Unfortunately, the pressures were too strong at EMI which the author should have backed out of.
  • 80/20. Aim to be 90% right in a short period of time rather than take forever to be 99% right. Quick success can create positive momentum.
  • Trusted lieutenants. The author stresses the key role played by his trusted team members in analyzing and fixing businesses in a number of cases.
  • Alternative uses. Businesses which generate low profits relative to their asset value can either be turned around as a business or sold for their asset value for alternative uses. At Phoenix Inns, the author and his team discovered that the vast majority of pubs weren’t making much money as a business compared to their asset value. As an illustration, a large pub was worth £40,000 as a business but had a real estate value of £400,000. It would have been expensive and difficult to improve it sufficiently, so it was sold off for alternative use.
  • Securitization. At Phoenix Inns, the author applied the securitisation skills he learned at Goldman Sachs by bundling the income that came from the long-term leases to back the debt they issued. The interest payments were lower than the income from the underlying leases, generating a positive cash flow. This approach was applied or attempted in other instances as a way to lower the cost of capital and/or repay the equity quickly.
  • Down-to-earth enhancement of customer experience. With William Hill, the author’s success came down to making the betting shops more female-friendly (e.g., ban on smoking, removal of blacked-out windows, bets on more than just horses) and technology savvy (e.g., internet betting). With Phoenix Inns, pubs which had not changed in 40 years were adapted to the local communities (introduction of food, wine, entertainment). With Tank & Rast, the toilets were renovated, and vouchers introduced along with branded food franchises to increase traffic and spend.
  • Capital efficiency. While arranging financing for companies at Goldman Sachs, the author realized that management teams of traditional companies tended to use their capital very inefficiently to become conglomerates or diversify into unrelated fields, instead of reinvesting in their core business. He thought money could be made by restructuring such companies, making them more efficient, and employing their capital more wisely. This was the reason for his move to private equity.
  • Tight spending budgets. At Phoenix Inns, the author required any expenditure above £1,000 to be approved. At Hand Picked Hotels, his wife Julia visits the hotel when she receives a request to change a carpet to see if it’s needed or not. In Germany, senior management intended to spend £2-3 million on redecorating expenses. She visited all the hotels involved, went through the drawings, spotted savings, had the whole process redone, and ended up with better quality at half the cost.
  • Emotional detachment: The author was tasked with turning around CCA, a subsidiary of Nomura which borrowed money in yen to make highly leveraged real estate loans (90% LTV) in the US. The company normally securitized the loans and sold them as quickly as possible, but 1998 saw the collapse of LTCM and a Russian debt crisis. With 20 of his best staff, he drew up a plan to unwind the business (firing of 90% of staff, securing liquidity from banks, obtaining a stay of execution from rating agencies, selling, secrutizing or repaying loans). This was possible because he was emotionally detached from previous decisions. With EMI, he took the CEO role and lost his objectivity.
  • Challenge, challenge, challenge. “When dealing with management, the role of a private equity team is not to establish a comfortable relationship; it should challenge, challenge and challenge them”. The author indeed believes most managers (1) have no sense of risk, only of upside, given the incentives at play, and (2) always believe they are doing a good job.
  • Shareholder decisions. The author believes a CEO should not have a vote in determining the strategy for selling a business, just as a CFO should not have a vote in determining the financing strategy. These decisions should be up to the shareholders.
  • Navigating crises. During the GFC, PE firms used a combination of letting portfolio companies go bankrupt, buying debt at a discount, and stopping doing deals. During the COVID pandemic, the author “hoped for the best but planned for the worst”: he (1) created a “Scenario, Contingency and Planning Committee” to address critical issues and make strategic decisions, (2) suspended deal origination, (3) ran different cash flow scenarios, (4) borrowed, extended loan maturities and made use of government liquidity lines, and (5) supported franchisees of portfolio companies through partnership payments.
  • Prepping for sale. Before selling Pamaco, the author addressed the following pieces of work:
    • Put a quality management team in place.
    • Explain cash flows and outline risks and mitigants to potential buyers.
    • Outline initiatives to improve profits and create a simplified business plan for each initiative.
    • Appoint a bank to run the sales process.
    • Improve management’s public-facing skills.
  • Learning from mistakes. When making a painful mistake, apologize and learn from it. After the EMI debacle, the author apologized to his investors and vowed not to repeat the same mistakes (emotional involvement, unusual proportion of assets in a single deal with cross-fund investments). This enabled him to rebuild trust, though subsequent issues with other deals would make it impossible for Terra Firma to raise another blind pool fund.
• Conversely, below are the pitfalls to avoid:
  • Shortcuts. The deals that went seriously wrong for the author did so because he and his team took shortcuts. He insists the team physically see what they want to spend their money on. [Personal note: This reminds me of Peter Lynch’s injunction to “know what you own”.]
  • Yielding to pressure. With EMI, the author yielded to various forms of pressure: (1) His firm had just raised €5bn and the teams were anxious to invest, all the more so as they were the underbidders on two previous deals, (2) The sellside advisors shortened the deadlines so there was no time to conduct a thorough due diligence or to secure final financing terms, and (3) Their buyside advisor Citi pressured them to submit an improved bid due to competition from Cerberus (which turned out to be bogus). He learned the hard way that “You’re only as good as your last trade”.
  • Trusting biased people. With EMI, the author realized (1) that “intelligent, experienced CEOs can give Oscar-winning performances if there’s enough at stake”, and (2) that “while the advisory role [of banks] is key, it can be all too easily distorted by the eye-watering incentive and bonus schemes so many banks offer their staff”.
  • Overexposure. Keep single investments below 10% of the fund’s size and avoid cross-fund investments.
  • Complacency. At Wyevale Garden Centres, the author, seeing results improved with a new management team, failed to listen to his team’s analysis on the shortfalls of management’s plan. Their initiatives predictably failed and results came back down to their starting point.
  • Failure to understand your customers. At Tank & Rast, the author and his team decided to upgrade the hotels (which were tired and cheap but had a high occupancy rate) to turn them into conference hotels with shiny and well-lit atriums. Bookings went way down. It turned out that the hotels were being used for extramarital affairs and prostitution
  • Customer concentration. With Annington Homes, the Ministry of Defense was the single customer, and their uncooperative behavior caused difficulties.

Starting a PE firm

• Partners. The author brought on two partners he had interacted with in the past, one with operational improvement experience, the other with fundraising experience (though not in PE).
• Fundraising. When launching Terra Firma, the author and his team were able to raise a record amount of €1.9 billion for their first fund (which they actually named Terra Firma II). Below are some of the lessons learned by the author in the process:
  • Focus on the biggest market (the US).
  • Don’t focus on numbers (if people told you their social security number you wouldn’t remember it in the morning).
  • Tell stories (if people told you about their wildest night in college, you’d remember it forever).
  • People want to know about the guy, not the deal.
  • Don’t sell on the first meeting (you don’t marry your wife on the first date).
  • Get people to want to have beer with you and to trust you first.
  • Tell people what you are trying to do in the fewest words possible.
  • Show you are passionate.
  • Elicit three pieces of information during each meeting: (1) Did they like you? (2) Did they trust you? (3) Did they believe you’d make money for them?
  • Set up your own meetings.
  • Use placement agents (to open their address book and help fine-tune your pitch).
  • Track record is not enough. The author naively thought that the reputation he had earned at Nomura from investing for 8 years would carry him through. But investors sought reassurance on many details (structure, staff, compensation structure, types of investments, names of other investors).
  • Secure an anchor investor. After a year of fundraising, the author had only secured £140 million. A meeting with CPP unlocked the door. They agreed to put in €150 million.
  • Put your money where your mouth is. The deal with CPP was that Terra Firma partners would need to put in €75 million in exchange for €150 million from CPP.
  • Be persistent. It took meetings with 400 potential investors in 70 countries to secure the €1.9 billion from 87 backers.
• Team. The author assumed his Nomura team would follow, but 2/3 left over the next 2 years and he only had about 20 people. After securing the funds, he went on a hiring spree, recruiting people from a variety of nationalities, backgrounds and careers, who were willing to work hard.
• Do deals where you clearly add value.

Other lessons

Objectives

• Write your high level objectives for the future. For the author, it was family, legacy, his firm, and purpose.

Thinking

• Think for yourself.
• One good argument is better than several pages of recycled facts.

Qualities to succeed as an entrepreneur

• Hard work.
• Drive.
• Stamina.
• Greed. Having been confronted with a tough childhood (uprooting, dyslexia, bullying) the author had a deep fear of losing everything, which explains why he was focused on creating wealth long after feeling rich.
• Creative ideas and innovative strategies.
• Achievable but tenacious goals.
• Pain plus reflection. Adjust your business principles each time you fail. [Personal note: This advice was given by Ray Dalio].

Avoid litigation

• It favors the bad (who don’t mind lying and are in it for the money) and harms the good (who won’t lie and care about principles).
• The only winners are the legal firms.

[Personal note: Charlie Munger heeds the same advice].

Leadership and teambuilding

• Find a coach / mentor. As he was about to transition from a technical expert with an entrepreneurial culture at Goldman Sachs to a business leader with entrepreneurial instincts at Nomura, the author asked Nomura to find him a business coach to advise and mentor him. He found that having someone methodically tear his ideas apart was extremely valuable as it could help him change his mind, change direction slightly, or convince him that he was right. A good mentor never tells you what to do, but ask you the questions most people don’t have the guts to ask you and make you question yourself.
• Hire for attitude. Skills and knowledge can be taught but attitude can’t. Rather than keeping managers with industry experience but the wrong mindset, the author chose, to run Phonex Inns, people with the right attitude who could learn the trade.
• Apply the Tuckman framework: According to Bruce W. Tuckman’s theory of group development, there are four phases any team needs to go through: (1) Forming: people get to know each other, discover each other’s strengths, weaknesses and reliability, and try to grasp the task at hand. They tend to play nice. Their leader’s job is to help them figure out objectives, roles and responsibilities. (2) Storming: people feel safer and start pushing the boundaries. There may be clashes as different personalities and working styles collide. The leader needs to keep the team focused and resolve conflicts. (3) Norming: The plan comes together. Team members benefit from others’ strengths and accept their weaknesses. They help each other out and start socializing. The leader should ask questions rather than issue instructions, and organize social events to encourage team-bonding. (4) Performing: The team is stable and the goals are clear. People get their job done with minimal supervision and conflict. The leader should encourage creative disagreement, help celebrate achievements, step back, delegate, and focus on vision.
• Reward high performers appropriately. At Nomura, the author learned this the hard way: he had the five most senior members of his team leave to competition after the sale of Angel Trains, as his bosses in London had decided to retain more than half of the bonus pool owed to the team to subsidize other less successful activities.
• Pay attention to your team. After this episode, the author became too self-reliant instead of finding experienced replacements.
• Be tribal. This is what drives people and creates team cohesion.

Information edge

• You only need a little more information than everyone else to make a lot of money. During his trading years at Goldman Sachs, the author realized to his amazement that some otherwise bright people traded on price without trying to understand the value, reading the prospectus or asking any question. [Personal note: This never ceases to amaze me. While working on a €2 billion “amend and extend” deal in 2009, I realized that only 30% of lenders in our pool of 100+ lenders had opened the due diligence reports. Similarly, most of the dozen or so banks involved in a restructuring deal I took part in a few years ago did not know the basic terms of the credit agreement.]

Innovation

• Use existing techniques in new areas. While at Goldman Sachs, the author experienced a massive pullback of Japanese buyers from the junk bond market in 1989 (the share of Japanese buyers of US and European junk bonds went from 50% to 0% as the Japanese government raised interest rates and discouraged banks from investing in risky foreign deals), causing a massive fall in price, and his firm to be stuck with a large inventory. Applying the existing technique of securitization, he created collateralized bond obligations (CBOs), a way of pooling a large number of bonds, and repackaging them into different tranches to suit different buyer needs (the top piece had a AAA rating and a short duration, while the bottom piece was effectively equity). Interestingly, the tombstone he received for underwriting the first CBO included a picture of a rubbish bin (the junk they started with) turning into a pearl (to illustrate the conversion achieved in investors’ eyes).

Mindset

• Think like an owner and not like an agent.

Selling to customers

• Harness the power of the spoken word.
• Learn to read people’s reactions.
• Discover what works and what doesn’t.
• Create emotional connections.
• Display goods in a way that encourages sales.

Technology

• Don’t underestimate new technology: After the mid-1980s technological revolution in the world of finance, old-timer salespeople and traders earning more than $1 million a year were fired and replaced by MBA graduates with computers earning $65,000, and doing far more and much faster trades

Profits and stakeholders

• Set an appropriate balance between giving the customer what they want and making a profit.
• Reducing prices often (though not always) leads to greater profits.

Systems and controls

• Put in systems and controls to ensure that trust is not put to the test.

Competition

• Too little competition leads to high prices and excess profits. Too much competition leads to low quality and instability.

Persistence

• Learn doorstepping.

Public speaking

• Remember that many of the best speakers find public speaking intimidating.

Case studies of deals

[Personal note: The case studies below contain information provided in the book but also in articles, websites, and press releases. Unfortunately, this does not allow a proper deal-by-deal performance analysis. Investor documents found online show a MOIC of 0.97x in total for Terra Firma Capital Partners III, which if accurate would not be as disastrous an outcome as the anticipated 50% markdown at one point in time Link]

Phoenix Inns (1995-2003)

• When setting up the principal investing franchise at Nomura, the first opportunity the author focused on was in the pub sector.
• The rationale was as follows:
  • As a customer, he had a reasonable understanding of what pubs were about.
  • The sector was undergoing dramatic change (thousands of pubs put for sale due to a cap on pub ownership by brewers, shift in drinking habits with supermarkets selling cheap alcohol, changing local demographics).
  • Management teams were struggling to keep up (poor quality and service, focus on sole beer revenues, no food or entertainment offering).
  • He had strong views about what could be done to improve their performance.
• He zeroed in on Phoenix Inns:
  • Collection of 1,800 pubs jointly owned by Grand Metropolitan and Foster’s.
  • 100% backed by assets but stuck in the past
  • He met the owner and settled on a price of £225m in 1995, based on the seller’s valuation as a multiple on the value of beer being sold in their pubs.
  • Since beer consumption had been going down, so had the pub chain’s value. The author and his team factored in what could be done with the properties, which uncovered substantial upside.
  • The due diligence consisted of visiting hundreds of pubs.
  • This field work enabled him to gain firsthand knowledge of the pub market, understand the locations and clientele of each pub (color coding then), review every aspect of his business plan, and find ways to maximize their value.
• The following actions were undertaken:
  • A team of four analyzed each pub: some had stayed the same for 40 years even though the community had changed, and several were late paying rent.
  • Their solution was to invite each pub manager to study their customer base and choose what drinks, food and experience to offer.
  • Realizing managers were not suited for the job (they were former pub operators who didn’t want to get their hands dirty anymore) he put his own people into most of the senior roles.
  • The new CEO made a large number of down to earth sensible changes: (1) change rent collection hours, (2) implement staff bonuses for rents paid and improved performance, (3) transform doomed pubs into car parks, flats, offices, restaurants or supermarkets.
  • Pub disposals generated £200m proceeds, recouping the bulk of the purchase price.
  • In 2001, the sale of the final portion of Phoenix pubs generated £406m proceeds.
• In the end, total cash profit reached £176m, and Nomura entered other pub deals. A bigger scale enabled them to negotiate beer discounts from brewers.

AT&T Capital (1995-2001)

• In 1995, Nomura bought AT&T Capital, a collection of 20 businesses from medical equipment to telecoms to document imaging.
• The company was dependent on two major contracts with NCR and Lucent whose equipment sales it financed.
• All but two businesses (in leasing) were kept, the remainder being sold or closed, which made the company leaner, more focused and more attractive.
• It was sold to a Canadian trade buyer in 1998, and taken over by a US leasing company in 1999. Terra Firma’s final stake was sold in 2001.

Annington Homes (1996)

• In 1996, Nomura purchased Annington Homes, which owns privately rented houses in the UK. Houses were rented to the Ministry of Defense on a triple net basis, which in turn rented them to service families.
• In 2012, Terra Firma bought Annington, along with 20 other investors, from Nomura for £1 billion, of which £450 million in equity and £550 million in debt
• In 2016, the author realized that the Ministry of Defence was deliberately not returning houses that were empty, which Annington could have sold to reduce its debt (£3 billion by then).
• The debt was successfully restructured with the help of Barclays, the company paid its first dividend, and entered into an arbitration agreement with the Ministry of Defense to settle their differences.

Angel Trains (1996-1997)

• The author and his team at Nomura then set their eyes on the British railway sector:
  • The government was privatizing the rolling stock operating companies (ROSCOs) as part of a larger breakup of Beitish Rail.
  • Existing trains had a lot more life in them than the market thought. The industry assumption was an average life expectancy of 30 years, but the author and his team found out (1) that some components dated back to WW1, while others were 5 years old, and (2) that they should be looking for a program of patching and mending so the trains could last 90 years.
  • The risk was much lower than other bidders thought. If a customer (train company) went bust, the government was obliged to step in to provide a replacement. As a result, credit risk was limited and the lease payments could be securitized to repay the capital invested.
• Nomura bid for three assets, and won the auction for Angel Trains at £700 million compared with to management’s bid at £550 million.
• Within 3 months, they raised £720 million of debt, returning back all capital plus a £25 million profit.
• The company invested and operations were improved.
• In 1997, the equity was eventually sold for £600 million to RBS, generating a huge profit.

William Hill (1997-1999)

• In 1997, Nomura bought William Hill, an operator of betting shops for £700 million, from a heavily indebted firm (Brent Walker Group).
• The success came from making the betting shops cleaner, more female friendly and technology savvy (internet betting).
• In 1999, after a failed IPO, it was sold to Cinven and CVC for £825 million.

Inntrepreneur (1997-2005)

• In 1997, Nomura acquired Inntrepreneur, a UK tenanted pub portfolio with 4,300 pubs across the UK. Tenants were required to purchase beer from the landlord or its nominated supplier.
• The estate was performing poorly and was plagued by tenant litigation concerning the legality of the tie agreement.
• The litigation-free pubs were sold to a separate Terra Firma company, the Unique Pub Company.
• The legal issues were resolved in the remining pubs, which were sold, converted to other uses, or transferred to Unique.

Thorn (1998-2007)

• In 1998, Nomura completed the take private of Thorn, an electrical appliance rental business with other activities.
• The company was lacking clear strategic direction and was inefficiently structured.
• The following initiatives were undertaken:
  • Disposal of non-core busineses.
  • Transformation of sales and pricing strategy in the rental businesses.
• The company was sold in 2007 to a financial buyer.

Inn Partnership (1999-2002)

• In 1999, Nomura acquired Inn Partnership, a UK pub company selling beer to, and receiving rent from, a protfolio of 1,240 tied, tenanted pubs. The business was a non-core subsidiary for its former owners.
• The following actions were undertaken:
  • The company rolled out a new pub franchise agreement offering discounted beer prices and assignable leases in exchange for higher rents, and converting income from variable (margin on beer sales) to fixed (rent).
  • Beer distribution and supply contracts were renegotiated to deliver cost savings through combined purchasing power.
  • Underperforming pubs were sold or converted to an alternative use.
• The company was sold to a trade buyer in 2002.

The Unique Pub Company (1999-2001)

• The Unique Pub Company was created in 1999 by Nomura to acquire a portfolio of 2,600 litigation-free UK tenanted pubs from their portfolio company Inntrepreneur.
• The following actions were undertaken:
  • Creation of a new supplier to the tenanted pubs.
  • New beer supply arrangement with lessees.
  • Acquisition of further pubs from Inntrepreneur.
• The company was sold, along with Voyager, to a consortium of trade and financial buyers in 2002.

Hand Picked Hotels (1999)

• In 1999, the author’s wife acquired Hand Picked Hotels, a collection of country house hotels in the UK and the Channel Islands, consisting of many historic properties.

Thresher (2000-2007)

• In 2000, Nomura purchased First Quench Retailing, a retailer of wine, beer, and spirits with 2,600 stores, from Punch Taverns and Whitbread for £225 million. In 2002, Terra Firma purchased the company from Nomura.
• The following initiatives were undertaken:
  • Improved procurement, merchandising, and pricing structure.
  • Closure or sale of 275 unprofitable low potential shops.
  • Rebranding to Thresher Group.
  • Acquisition of Leaping Salmon (to exploit the links between food and wine) and stores from rival retailer Unwins.
• The group was sold to a consortium led by Edmund Truell (cofounder of Duke Street Capital) in 2007 for £250 million, and flipped two weeks later to Vision Capital.

Le Méridien (2000-2005)

• In 2000, Nomura led a consortium to acquire Le Méridien, a group of 134 mostly four and five star hotels, from Compass for £1.9 billion, of which £1.1 billion of debt.
• The following initiatives were undetaken:
  • Conversion of unused or under-utilized space.
  • Increase in room rates by rolling out a new bedroom format.
• In 2003, the group got into financial difficulties during the post September 11 hotel industry downturn, breached its covenants, and was restructured. Nomura’s equity stake was written off.

Hyder Business Services (2000-2007)

• In 2000, Nomura acquired Hyder Business Services (HBS), a business process outsourcing and information technology company with the local government as its main customer base.
• HBS was not achieving its potential as a small, non-core division of a large utility parent.
• HBS cut costs substantially, signed long-term contracts, and was sold in 2007 to a trade buyer.

Voyager Pub Group (2001-2002)

• In 2001, Nomura acquired Voyager Pub Group, a UK portfolio of 982 unbranded, largely managed pubs.
• The following initiatives were undertaken:
  • The pubs were converted from a managed to a tenanted estate, leaving it to incentivized tenants to run pubs more efficiently.
  • Head office and operational expenses were cut.
• In 2002, the company was sold, along with Unique Pub Company, to a consortium of trade and financial buyers.

Deutsche Annington (2001-2014)

• Deutsche Annington was created in 2001 when Nomura acquired 64,000 residential properties from the German Federal Railways. The company was set up to own, maintain, and rent the properties and sell individual units to tenants and third parties.
• Housing had been managed on a not-for-profit basis, leaving ample room for efficiency savings and professional management.
• Terra Firma tripled the size of the portfolio through add-on acquisitions.
• The company completed an IPO on the Frankfurt Stock Exchange in 2013, and the shares were distributed to investors in 2014.

Odeon and UCI (2004-2016)

• In 2004, Nomura acquired Odeon and UCI as two separate businesses and merged them to create a leading European cinema operator.
• The following initiatives were pursued:
  • Investments were made to improve the customer experience (new sites, premium seating, broadened food and beverage offering with a focus on more healthy options, guest-centric employees).
  • Separation of UK properties from the operational business, which enabled a return of capital to investors.
  • Debt refinancing to lower cost of capital.
• The company was sold to AMC Theatres in 2016.

Tank & Rast (2004-2015, 7.5x MOIC)

• The author’s first deal at Terra Firma was Tank & Rast, a German motorway service group.
• The rationale for the deal was as follows:
  • Virtual monopoly along the German autobahn system.
  • Concessions with rents from 276 tenants, and commissions from oil companies.
  • 500 million visitors every year.
  • Significant upside in terms of customer spend (only 6% of potential customers stopped at their outlets and only 50% of them spent money, vs 12% and 75% respectively for European peers).
• The team made the following changes:
  • Consolidation of the 400 sites under 150 of the most effective tenants.
  • €60 million program to upgrade the toilets (main reason people stop, terrible condition), using standard easy to maintain models, and financed with a voucher system (fifty cents restaurant voucher for fifty cents spent on a trip to the toilet). Customer satisfaction with the toilets increased from 35% to 97%.
  • Centralization of procurement.
  • Standardization of signage.
  • Introduction of branded food outlets.
  • Failed upgrade of hotels.
• The business was sold to Allianz and other infrastructure funds in 2015. Terra Firma achieved a total return of 7.5x.

Waste Recycling Group (2004-2006)

• In 2004, Terra Firma acquired Waste Recycling Group, the leading waste disposal operator in the UK.
• At the time, the UK waste industry was undergoing radical change due to stricter regulation and the need to develop alternatives to landfill assets.
• Within 12 months, Terra Firma (1) acquired the UK landfill assets of Shanks, increasing market share to 30% and the average life of the portfolio to 17 years, and (2) completed the largest sterling high yield debt issue to return capital to investors.
• In 2006, the company sold its waste disposal business to Spain’s construction company FCC for £1.4 billion. Its waste-to-energy business was retained as Infinis.

East Surrey Holdings (2005-2013)

• In 2005, Terra Firma acquired East Surrey Holdings, a multi-utility with two gas distribution businesses (ESP and Phoenix) and a water supplier business (SESW).
• The rationale was to separate and reposition the assets and resolve regulatory uncertainty.
• SESW and ESP (since merged with BGCL to create one of the largest gas distributors in the UK) were sold to infrastructure investors in 2006.
• Phoenix was sold in three separate transactions in 2008, 2012, and 2013.

AWAS (2006-2017, 1.6x MOIC)

• In 2006, Terra Firma purchased aircraft leasing company Ansett Worldwide Aviation Services (AWAS) from Morgan Stanley for $2.5 billion. The company made money from the spread between rent charged to airlines and the financing costs paid to acquire the aircraft. [Personal note: In the 2005 Wesco annual meeting, Charlie Munger commented on this type of aircraft leasing carry trade as follows: “There’s a lot of leverage in those carry-trade games. Other people are more certain than I am that aircraft can always be leased.”]
• The rationale was as follows:
  • Commercial aircraft fleet expected to double by 2030.
  • Shift from owning to leasing aircraft.
  • Repositioning potential by diversifying the customer portfolio.
• The team took the following actions:
  • Extract money from older aircraft by leasing them to mid-market airlines for a higher rent (13-20% return).
  • Attract premier airlines with new aircraft (9% return) via the acquisition of a competitor (Pegasus) and discounted orders to Airbus and Boeing.
  • Cut expense accounts.
  • Improve governance and best practice.
• In 2015, a portfolio of aircraft was sold to Macquarie for $4 billion. In 2017, the rest of the business was sold to Dubai Aerospace Enterprise for $7.5 billion, yielding a 1.6x cash return. [Personal note: the author mentions that NOPAT was increased by a factor of c8x from $35 million to $273 million at its peak. The discrepancy with the MOIC probably stems from a considerable increase in debt to acquire the aircraft and a multiple compression at exit.]

Four Seasons Health Care (2012-2017)

• In 2012, Terra Firma acquired Four Seasons Health Care, the largest chain of nursing homes in the UK, for £825 million.
• Four Seasons operated 500 care homes with 20,000 residents, and 61 specialist care centres with 1,601 beds.
• The rationale was as follows:
  • Spending on elderly care would at least keep pace with inflation.
  • There was plenty of scope for improvement:
    • The company was hemorrhaging money and the nursing homes were not well run.
    • Savings could be made in procurement, medicine and food costs through better management and a better deal with Boots.
    • The company could train its own nurses.
  • The price was attractive. Terra Firma had offered £900 million in 2006 but had lost to a Qatari fund’s £1.5 billion offer. RBS had since taken control after a covenant breach and was looking for a new owner.
• The team debated about the opportunity because of the potential PR challenge but eventually decided to go for it.
• The company faced various challenges:
  • The private care business was doing well, but the public care business was struggling, dependent on funding from cash-strapped local authorities (government austerity).
  • Some nursing homes weren’t viable, others operated to unacceptable standards, and the Southern Cross homes did not benefit from synergies.
  • H/2 Capital, an American vulture fund, had begun buying the company’s debt.
• Due to government cost-cutting, the company was eventually yanked from Terra Firma’s control and taken over by H/2 Capital in 2017.

Infinis (2006-2017)

• In 2006, Waste Recycling Group’s landfill gas division was demerged to create a standalone business, Infinis, which retained the rights to the landfill gas produced by WRG’s landfill sites and used it as fuel to produce renewable energy for the UK electricity grid.
• The company increased its landfill gas-generating capacity and developed an onshore wind business.
• In 2013, it refinanced its debt and completed an IPO on the London Stock Exchange. In 2015, Terra Firma regained full control. The landfill gas activities were sold to 3i Infrastructure in 2016 and the offshore wind business was sold to JP Morgan Asset Management in 2017.

EMI Group (2007-2011)

• In 2007, Terra Firma took EMI, one of the top four major music groups, private in a deal worth €5.9 billion, with £2 billion of equity and the remainder in debt provided by Citi. The company had been on their radar since 2004. In 2006, discussions with Permira aborted. In 2007, EMI issued a profit warning, and the business was put for sale by Citi and Greenhill.
• The plan was as follows:
  • Maximize the value of the back catalog and borrow against it (securitization).
  • Become a lot more selective on new releases (85% of which never made a profit).
• But Terra Firma had less than two weeks to complete their due diligence. This time pressure prevented them from picking up on several warning signs: (1) The CEO was overly optimistic, (2) Citi convinced them to up their bid to counter Cerberus (which ended up not being there), (3) The US real estate bubble was beginning to burst, and (4) Citi initially did not secure credit approval for the bridge to securitization. It also prevented them from securing final terms on financing.
• Between the offer and the completion of the take private, the situation deteriorated: (1) current trading was softer and (2) Citi tweaked the interest rate and covenants.
• The author soon discovered other issues:
  • Lack of diversity in the management team.
  • Unrealistic projections.
  • Wrongheaded focus on fighting file sharing.
  • Profligate spending on parties (charged to artists’ royalty accounts), drugs, and prostitutes.
  • Accounting tricks: record sales were reported based on albums shipped rather than albums sold.
• After the departure of the CEO, the author unwillingly stepped in, which he later viewed as a major mistake:
  • Lost momentum trying to bring existing staff onboard.
  • Neglected his tribe at Terra Firma.
  • Held divisive speeches.
  • Treated EMI as a child to mend rather than as a commodity to manage.
• In 2011, EMI was put into administration and sold to Citi in a pre-packaged process. Terra Firma went to trial against Citi for misrepresenting that there was another interested bidder and failing to reveal key information about its creditworthiness, but to no avail. EMI’s recorded business division was sold in 2011 to Universal Music.

Consolidated Pastoral Company (2009-2020)

• In 2009, Terra Firma acquired CPC, the largest privately owned cattle producer in Australia.
• The size and productivity of the herd was increased, 8 of the 15 stations were sold to local and global buyers over 2019-2020, and the remaining 7 to the Hands Family Office.

EverPower (2009-2018, 0.8x MOIC)

• In 2009, Terra Firma acquired EverPower, a wind power business based in Pittsburgh.
• The rationale was to scale up the operating and development business with the support of state and federal incentives, at a time when the GFC hed left many companies in the sector unable to finance their development plans.
• Capacity was grown 12-fold, via organic development combined with the acquisition of two wind farms.
• President Trump’s bearish comments on green energy sources after his election in 2016 did not help.
• In 2018, the business was sold in two separate transactions to BlackRock Real Assets and German energy company innogy for a gross cash multiple of 0.8x, rather than the c3x initial goal.

RTR (2011-2018)

• In 2011, Terra Firma acquired RTR, a solar photovoltaic energy operator in Italy.
• The opportunity was to strengthen the business through consolidation and professional management.
• RTR completed 8 acquisitions, which brough capacity from 144 MW to 334 MW, and introduced monitoring systems.
• In 2018, the company was sold to infrastructure fund F2i for €1.3 billion, i.e. 10x 2017 EBITDA of €130 million.

Wyevale Garden Centres (2012-2019)

• Wyevale Garden Centres (then known as The Garden Centre Group) was a retailer of gardening products with 129 centers in England and Wales.
• Terra Firma bought it in 2002 for £276 million from Lloyds Banking Group, which had taken control of it in a debt-to-equity seap in 2009 after it had failed to make interest payments.
• The rationale was the following:
  • The business had a property value of £400 million, but was not producing a lot of profit (£27 million) compared to asset value.
  • The real estate component was very attractive (former farmland in the edges of towns with the potential to be developed for housing and retail).
  • The company had been underinvested during Lloyds’ stewardship.
  • It could be run better by maximizing sales, notably with its homeware, restaurant and food concessions.
• Terra Firma brought in a new management team, which increased earnings from £27 million in 2012 to £56 million in 2014, and set on the journey to reach £100 million by making a number of changes (national brand, food and beverage offering, centralized warehouse, new allocation of space, etc.).
• But analysts at Terra Firma concluded (1) that the business didn’t have the skills or discipline to undertake these changes, and (2) that customers didn’t want a national brand.
• The author admits to not having heard their advice, letting management go on, and making the following mistakes.
  • Misconceived strategy: He had the misconceived ambition of turning the company into a nationwide operator which (1) would buy perishables centrally with economies of scale and (2) sell them at the same time throughout the country. But Britain is a collection of micro-climates and different weather patterns, and local suppliers saw selling nationally as a burden rather than an advantage.
  • Complacency. The team had become too close to management and felt an emotional connection. Giving the doubling of profits, it did not challenge them enough.
• As a result, the initiatives predictably failed, and earnings went back down to £27 million. Terra Firma brought another management team led by a veteran retailer who concluded the damage could be reversed.
• The company later faced liquidity issues during a massive cold wave, and was eventually broken up and sold over 2018-2019 in 57 transactions for £404 million, allowing to recover £80 million of equity.

Welcome Hotels (2016)

• In 2016, Terra Firma acquired Welcome Hotels, a portfolio of three and four star MICE (meetings, incentives, conferences and exhibitions) hotels in Germany, from Haus Cramer Group, which were looking to focus on their core brewery business.

Food Folk (2017)

• With his family office, the author won the 17-year master franchise agreement for McDonald’s in the Nordics, which oversaw 433 restaurants in the region, for €400 million.
• During the COVID pandemic, he provided financial support to c10% of franchisees, and ended 2020 with flat sales.

Parmaco (2018-2021)

• In 2018, Terra Firma led a consortium to acquire Parmaco, a Finnish company specialized in building and renting quality, flexible and modular buildings for schools, day-care providers, and nursing homes.
• The rationale was the following:
  • Asset-backed leasing business.
  • Fast-growing with an ambition to double in 3-5 years.
  • Modular solutions as an alternative to fixed buildings.
• The actions undertaken are as follows:
  • Portfolio expansion from 192,000 sqm to 280,000 sqm.
  • Replacement of CFO (departing) and CEO (going part-time).
  • Preparation for sale (tough questioning to ensure a clear explanation of cash flows, risks and mitigants, initiatives to maximize profits with their simplified BP, coaching on public-facing skills, appointment of a sell-side advisor).
• The company was sold to Partners Group for over £1 billion in February 2021.