Can Gerry and Spence fix infrastructure?

A corporate legend breezes into the PEI boardroom. Asked by James the photographer whether he wishes to freshen himself up before having a few pictures taken, Sir Gerry Robinson appears affronted, smoothing his hair and asking if a makeover is really necessary. But this is no celeb-style hissy-fit: Robinson is being deliberately theatrical, and follows his question with a roar of laughter.

Robinson is here with former Macquarie debt advisory veteran Spence Clunie, the two of them having recently launched Ancala Partners. Ancala is a London-based start-up fund manager that will seek to raise equity to address the funding needs of infrastructure and essential services businesses that require refinancing.

Clunie has frequently spoken of the looming “refinancing wall” when capital structures supporting infrastructure assets need to be refinanced in a much less conducive environment than that which pertained pre-Crisis. Indeed, he has done such a good job of talking about it that he has imbued it with a kind of mythical status. In pure numerical terms, the “wall” is €90 billion of infrastructure-related debt that needs to be refinanced between this year and 2016. In the minds of management teams, it might very easily conjure nightmare visions of colliding with solid objects at high speed.

Cold sweat

Managers waking up in a cold sweat at this prospect might rather welcome negotiating with Clunie, an embodiment of calm whose careful choice of words and laidback demeanour mark him out as a man for a crisis. “Management teams are keen to engage because of the uncertainty on refinancing and what this means for theirmanagement incentive plans,” he says.

“They want a stable capital structure and funds to implement their growth plans. Anything short of a proper refinancing is unlikely to achieve this and hence inhibits their ability to grow their businesses.”

And that’s where Ancala will come in. “Some of those businesses facing a refinancing have good underlying characteristics but they require new capital to de-leverage or for capital expenditure. We will provide new equity capital on an opportunistic basis. Our aim is to stabilise balance sheets and grow cash flows over a three- to five-year period to take these companies back to what they always should have been – stable, cash-generative businesses delivering an attractive cash dividend yield for equity investors.”

Ancala will target assets across the infrastructure spectrum. Ancala’s website has a graph showing target investments, which range from regulated assets to operational assets such as telecoms and storage. “All of them will have the capacity to be influenced by disciplined management action,” says Robinson.

But how will these assets be transformed, exactly? “There are many ways of doing this from straight asset cash flow development and balance sheet reorganisation to selling off parts of businesses or joining businesses together: whatever makes sense to turn them into stable long-term cash-generating assets,” says Clunie.

Clunie – who joined Macquarie from Dresdner Kleinwort Wasserstein in 2005 and established its European debt team from scratch – will be the yin to Robinson’s yang. Clunie the cool-headed finance guy, Robinson the rather more animated operational expert. It’s a relationship that the two men are confident will work. “We don’t trip over one other,” says Robinson. “We have complementary skills and we just get on with it as a team.”

Hostile take overs

The 62-year-old has made a more impressive job of “getting on with it” than most. As finance director and sales and marketing director of Coca Cola UK and then as chairman and chief executive of media firm Granada, he turned the businesses from losses to profits within two years and one year respectively. At Granada, he undertook the famous hostile takeovers of London Weekend Television and Forte Group (as well as the less celebrated failed takeover of Rentokil Initial). In 1987 he led the management buyout of the contract services division of Compass from leisure business Grand Metropolitan, in what was then the largest such deal ever.

The weighty Robinson CV also includes spells as chairman of drinks giant Allied Domecq and media heavyweights ITN and British Sky Broadcasting Group (BSkyB). He was also chairman of England’s Arts Council for six years from 1998 and was awarded a knighthood for services to the arts and business in 2003.

He has also developed a television career, presenting programmes such as “Can Gerry Robinson fix the NHS?” [Gerry tries to solve the problems of Britain’s health service], “Gerry Robinson’s Car Crash” [Gerry investigates Britain’s ailing car industry] and “Gerry’s Big Decision” [struggling businesses attempt to persuade Gerry that they’re worth investing in]. No task too big for Gerry.

From all these experiences and more, what appears to surprise Robinson most is the similarity of management failings – whatever the business. “The same issues come up again and again,” he insists. “They’re nearly always the same, particularly in defensive businesses.”

Warming to the theme, he continues: “It’s a shock how often companies are under-managed. Are they clear about what they do? Do they have the right people? Are they doing interesting but not profitable things? These questions are not asked enough.” He speaks of a small number of basic procedures that “will improve profits and hold people to account. Being held to account is often positive because there’s nothing worse than when you’re doing a good job and no-one notices. It’s about giving people clear objectives and then following up.”

Conduct an internet search and you will find plenty of anecdotal material about Robinson. Much will focus on his charm and obviously warm nature – he seems adept at putting people at ease and laughs loud and frequently. There are also reminders that here’s a man who fought his way to prominence in the 80s – a time when to be a success in the business world, possession of a mean streak was de rigeur. “Disciplined” is a word often used in descriptions of Robinson.

Hence, management teams wanting to understand what Ancala will expect of them might be advised to look beyond one of Robinson’s favourite current phrases – “active infrastructure” – to the title of one of his other TV programmes, “I’ll Show Them Who’s Boss”, in which he dished out no-holds-barred advice to family businesses.

The ‘insider’

Whatever you call it, there is already some evidence that the Robinson method works in an infrastructure/essential services context. Clunie and Robinson first met when Clunie led a principal investment from Macquarie’s balance sheet in Moto, the UK motorway services chain, when it was divested by Compass in April 2006. Having led the buyout of Compass and overseen its subsequent merger with Granada, few people knew the asset better than Robinson.

He was invited to become involved in the acquisition process and was then appointed chairman.

Says Clunie: “We decided it would be beneficial to have an industry leader on our team to ensure that what we thought we understood about the business was indeed correct in practise. Gerry was the obvious choice given his extensive industry experience and history with the vendor.”

Over the following four years, Moto doubled its EBITDA. “There was no big redundancy programme [at Moto],” says Robinson. “It was all about testing what customers really wanted and detailed management techniques. For example, we installed cameras so that we knew when someone was needed to serve on a till where people were queuing. There were upgrades and new aspects to the offering. It was also about motivating people to perform. You can frighten people for a day but, in the end, you have to make people feel good. That creates a real value for the business which, in turn, makes the financing side easier to deal with.”

In March this year, Macquarie – still at this point retaining Clunie’s services as a consultant – achieved a successful refinancing of Moto via £450 million (€506 million; $732 million) of new bank debt (provided by 14 banks) and £176 million of high yield bonds. “Moto performed through the recession and exceeded its business plan so our strategy proved to be right, which is satisfying,” reflects Clunie.

Given the positive experience with Moto, and the fact that he had formed a productive working relationship with Robinson over the period of ownership, Clunie pondered whether a successful one-off transaction might be the basis of a longer-term partnership between the two men. Hence, in August last year, the concept of Ancala was discussed – and then taken forward.

Co-investors wanted

Having only recently finished advising Macquarie, Clunie says the process of discussing Ancala with “large LPs” has just begun. Ultimately, he says, the firm would like a fund of up to €500 million.

However, because he believes the opportunity to be bigger than such a fund could exploit – and also because a near-term pipeline has been identified – the firm is also looking for co-investors for individual transactions who “can have involvement from day one”.

Partly because of the refinancing wall, Clunie and Robinson believe they have fairly clear visibility on when suitable opportunities will arise. “We know that critical deadlines are coming and owners of businesses will be forced to confront reality,” says Robinson. “And we’ll develop our proposed solution and position ourselves as those deadlines approach. We know the stakeholders and the companies well and can cherry-pick the good opportunities. It’s unusual to have that knowledge and it allows us to originate proprietary deal flow. When the time comes, we’ll offer what we think of as a ’total solution’ [of financing and operational expertise] and seek to deploy capital on an opportunistic basis.”

But what is it that makes both men so confident that the trigger points they are waiting for will arise? Aren’t they worried that their timetables may end up awry? The answer is no, because they can see the pressure growing. “Banks initially took the view post-Crisis that things would get better and hence a roll-over of their debt would be the best solution,” says Clunie. “We are nearly four years into this Crisis, the market hasn’t improved materially and banks are only just starting to shrink their balance sheets and hence are starting to push for their loan positions in companies to be repaid in whatever way possible.”

That said, Clunie expects equity holders to delay the inevitable for as long as possible. “I expect equity to act when they have to, when there is a maturity looming or a default. In the worst cases, they will seek an extension with a small equity injection – if they have any – which doesn’t provide a long-term solution and I believe is unlikely to be satisfactory for banks or management teams.”

Facing the truth

As mentioned earlier, managers will in all likelihood be keen to engage in order to try and obtain the kind of capital structure that will enable growth. Robinson acknowledges that “it’s hard for management teams [to face up to the reality of what assets are worth now]. They thought there would be a big reward at some point and now there won’t be. It’s hard to go back to the starting position. When there’s a default or refinancing looming, that’s when the psychology changes in terms of admitting what your asset is really worth. It’s a bit like what’s happened in the housing market.”

With businesses having suffered from frothiness and hype, Robinson seems genuinely pleased to be part of a process he sees as one of salvation and cleansing – tidying up the mess and putting solid foundations back in place. “I’m excited about the long term. When money was cheap, things were a bit too jumpy for my liking. What we’re doing is focusing on investing in ‘active infrastructure’ businesses and through balanced financing and strong management, getting these companies out of a hole and back to where they should be.”

Still on the subject of the long term, I ask about the five-year plan for a fund which seems almost opportunistic in nature, given that much of the refinancing that needs to be done will probably be undertaken in the next few years. What happens when the bulk of this opportunity has come and gone? “There is certainty in the present,” says Robinson.

“The pipeline is stronger now and for the next three years than perhaps it will be in five years’ time. But this type of opportunity will always apply. There are always capital constrained businesses or those with inefficient financing. The characteristics of our fundamental strategy will not change. We seek to deploy capital opportunistically into good underlying businesses that need new capital.”

In due course, Ancala will seek to add to its current team of five. “As we start to work on specific deals we will bring more people on board,” says Clunie. “We have identified the right people to execute the strategy.”

Constructor, transformer

However many people are eventually brought into the team, the spotlight will almost inevitably alight on the double act centre stage. Having seen the two sit side by side, I have a better appreciation of the functioning of this partnership. Clunie is the constructor. “The highlights of my career are those times when I’ve had a strategy, seen it work through and proved that what I thought was rational turned out to be right,” he says.

Robinson is the transformer. Asked for his highlights, he responds: “When I went from finance director of Coca Cola in the UK to marketing director. That was great, an exciting time. Then there was the turnaround of Granada and I hugely enjoyed working with Sam Chisholm at Sky when it was turned from loss making into something enormously exciting.”

Clunie, who says his non-work time is spent with his family, notes how happy his children are when they decide to build something and it works. Something in the genes, perhaps? Robinson says he loves nothing better than “working on trees that have been neglected. I love to get to work on them with chainsaws and clippers. I like woodwork as well, making furniture. You make something, you step back and look at it and it’s beautiful.”

“Transformational,” I note, nodding sagely.

Robinson seems genuinely surprised by – and appreciative of – this apparent psychological insight, but it’s not the first of the afternoon. Clunie had already proffered the view that he and Robinson are “both pretty stable” – an observation I made a great play of noting down to the accompaniment of Robinson’s trademark laughter.