Derby is to be deleveraged; Raleigh UK will have cash to move forward

The shareholders and bondholders will lose out in the forthcoming restructuring of the Derby Cycle Corporation, but the senior lenders and worldwide creditors will all be paid. The deleveraging will mean local operating companies such as Raleigh in Nottingham will be able to move forward free of Derbys debt mountain
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Alan Finden-Crofts, Derbys executive chairman since January, told BikeBiz today that the shape of the groups new structure will be known within the next 4-6 weeks.

He said: The business WILL be refinanced. The sponsors [ie Thayer and Perseus] will lose out but the banks and creditors wont. And the individual operating companies are not at risk.

Derbys bondholders currently hold bonds worth 30 percent of their original value. And shareholders are also looking down the barrel of major losses.

Almost every VC [venture capitalist] thats come into the bike business has got their fingers burnt. They think they can quickly go for significant growth and significantly increase the profit margins but it cant be done that easily in the bike trade. Its a very conservative and stable trade if you look at it over the last 30 to 40 years.

When the group was refinanced by venture capitalist funds Thayer and Perseus of Washington in May 1998 they paid a high price and incurred significant debt, says Finden-Crofts, and then installed a CEO who spent too much money on consultants and a centralising, corporate HQ in the USA. Debts were piled on top of debts and something eventually had to give.

CEO Gary Matthews was removed and Finden-Crofts the previous co-owner of Derby was reinstalled at the top of the group. He embarked on a massive pruning back exercise.

The business was so highly leveraged you only had to have one problem to damage the finances of the whole group. Last year Derby Germany had a problem with a new

computer system that was installed. We lost control of inventory for a while and that sucked in cash before it was put right.

In the last three months we have improved our credibility with the banks. The problems havent totally gone away but the banks are now less nervous about us. They had every right to be nervous last year.

The restructuring is being handled by merchant bank Lazard of London. Thayer and Perseus will most likely leave the picture, losing much of their investment. Bond holders will also lose out. The banks will be paid and so will creditors. Individual companies, such as Raleigh in the UK, will start afresh, with a blank sheet of paper.

The individual operating companies are basically healthy, says Finden-Crofts.

The refinanced groups working capital can finance the new loan arrangements.

Finden-Crofts has brought back many of the trade veterans especially in America who were jettisoned by former CEO Gary Matthews.

Weve brought people back who know the business. This is not cronyism, Im not that kind of guy. People like Bill Austin [Derby USA] have hit the ground running and put things right quickly.

There are now no whizz kids here. No miracle makers. Just people with experience. Its all about common sense, hard graft and telling it like it is.

I came back because I couldnt stand by and see the dismemberment of the group I spent 12 years building up into the biggest bike group in the world. I dont need the money. Ill lose money myself in Derby because I put money back into the group after the 1998 refinancing, but thats how it goes.

When pressed about the MBO rumours surrounding Dutch brand leader, Gazelle, Finden-Crofts said:

If somebody offered a huge price for Gazelle wed be silly not to consider it. The recent unsatisfactory management actions and the latest financial results of the group have led to consideration of management buy-outs by some of our operating companies. I see this as a positive situation as it confirms the committment and inherent worth of local managements to their businesses."

Derby South Africa and Diamondback Fitness would be the most likely of the non-core assets to be sold, something the senior lenders requested last month.

The restructuring of the group will take 3-4 months to complete.

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