3i has made a 20x return with the £81m sale of its minority stake in William Wilson. Tom Allchorne looks at how 3i is tidying up its portfolio.
When 3i first got involved with William Wilson, a Scottish based supplier of electrical, plumbing, heating and building products, Edward Heath was British prime minister, the UK changed its currency from shillings to pounds, and the Industrial & Commercial Finance Corporation was a whole three name changes away from becoming 3i. It was in 1971 when the firm provided the business with a loan, acquiring an equity stake in 1976, building up its stake to 36% and investing a total of around £1m.
The £81m sale to Wolseley, the UK headquartered heating, plumbing and building materials supplier, has made 3i £22m, a 20x with an IRR of 17%. The owners of William Wilson, brothers Graeme and Sandy and their sons Michael and Collin, are reported to be receiving around £15m from the proceeds of the sale. The deal sees Wolseley take on Wilson’s £14m debt and a pension deficit of slightly under £5m. Chairman Graeme and non executive director Sandy both announced their retirement with the news of the deal.
For Wolseley, the acquisition is the latest in a long line. It has spent the last year embarking on a hectic acquisition strategy, which has seen it, like other large companies in the sector, buying up smaller businesses in an effort to consolidate the industry. In October, it bought Encon, a UK specialist distributor of insulation products, again from 3i, which bought the company in 1997, and in December 2003 Wolseley bought Tobler, a Swiss distributor of heating and ventilation systems. Since the beginning of the financial year on August 12005, a total of 11 distribution businesses in Europe and North America have been acquired by the group for an aggregate consideration of approximately £317m in cash.
Judy Mackie, 3i portfolio manager, said: “Since we invested in William Wilson, the company has grown strongly to become one of the leading players in the industry. The building products industry is rapidly consolidating around a small number of large players and we believe this acquisition offers a great opportunity for both William Wilson and Wolseley.”
For 3i this marks the latest development in the management of its legacy growth capital portfolio. In the firm’s annual report published in March 2005, it was revealed that the Smaller Minority Investments (SMI) initiative, established in 2001 to look after the firm’s older and lower growth investments, made a gross return of 7% (£70m), which comprises £86m of income receipts, realised profits of £2m and a net unrealised valuation reduction of £18m. The SMI portfolio actually made more money to the year ending in March 2005 than 3i’s venture realisations, with £198m compared to £156m (in 2004 the figures are even further apart, with SMI making £236m and venture just £91m).
In the report the firm stated that over the medium term it was aiming to realise this portfolio, which consisted of 807 investments valued at £762m, representing 18% by value and 54% by number of 3i’s total portfolio. By the time of the interim report in September, the SMI portfolio comprised of 676 companies valued at £663m.
3i’s strategy with taking minority stakes relies on trusting the management team of the company concerned. Because the firm is not going to have control over the business, it is essentially entrusting its investment to the managers, although obviously there are certain safeguards in place, which as a result can often mean that the legal negotiations are more complex than they would be for a regular majority stake acquisition, to ensure that every conceivable problem is covered. For the managers themselves it means they can receive the much needed investment and retain control over the operation of the company.