Fortress takes on infamous Boxclever

Private equity firms are helping to wind up WestLB’s principal finance unit, which hit the rocks in 2003 when a €750m securitisation for Boxclever collapsed.

Turnaround specialists Fortress Investment and Cerberus have finally agreed terms with WestLB after almost of year of negotiations. Wrangling among bondholders, WestLB, CIBC and CDC, over the distribution of proceeds delayed the deal.

The challenge going forward is to build value at the television rental company because previous shareholders Granada and Nomura pared equity to almost zero when problems started to emerge at the firm.

Boxclever sailed into trouble based on an ill-fated growth strategy that meant its service division would service third parties in addition to its own TV rental customers. That decision stirred controversy with bondholders, who had preferred to view the company as a cash cow.

In the event of things, the bondholders were right. Fortress and Cerberus will have to prove their mettle as restructuring specialists because Boxclever left WestLB with almost €600m in provisions. That tally was part of €1.7bn in total provisions that, in 2003, led to the resignation of chairman Jurgen Sengera.

The securitisation refinanced a €860m acquisition financing that created Boxclever out of the merger of Granada and Radio Rentals. It left the company highly leveraged, and when the third-party service idea failed to deliver growth, the securitisation unravelled.

At the time nobody was surprised. Consumer rental streams on electronic equipment were never the most iron clad of cashflow streams and there was no shortage of pundits saying the business should never have been securitised. The bondholders put the service companies into administrative receivership.

Fortress and Cerberus will now pay £200m for Boxclever, some £100m short of the initial offer placed with restructuring agent Pricewaterhouse. The reduction is understood to have come about because the bondholders have been paid down by about £100m in the last 12 months.

WestLB is close to dissolving all of its principal finance positions. Private equity firms are well positioned in the auction for one of its two remaining assets, Mid-Kent Water. Other shortlisted bidders comprise Ecofin Water and Power, Deutsche Bank and an investor group advised by Dresdner Kleinwort Wasserstein.

WestLB is running the Mid-Kent Water auction itself, although Goldman Sachs was hired to find buyers for the other principal finance businesses.

The now defunct principal finance unit was led formerly by Clearbrook Capital’s Robin Saunders. Previous interests in Pubmaster and Odeon Cinemas have been sold to Punch Taverns and Terra Firma, respectively.

Built up in 1999, the WestLB unit and its failure illustrate the pitfalls when banks attempt to marry high-risk financings with structured finance exits. WestLB is concentrating on its core equity business in Germany and withdrawing from what it now considers peripheral activities, like principal finance.