Inside Track by John Harrington
Steve Benger, former chief executive of national drinks wholesaler WaverleyTBS, is probably using understatement when he describes the period around the company’s demise as “fraught”.

Few collapses in this industry have had such an impact, and affected so many people so quickly, as that of Waverley. The company folded in October leaving £64.5m in debts to unsecured creditors, a report from its administrator Deloitte found, with seven drinks companies owed seven-figure sums each - Diageo topped the list on £6.1m. There were 196 trade creditors in total, and most were drinks firms.

That’s not to mention the obvious knock-on impact on the supply chain for retailers, and fundamental questions about the future of drinks wholesaling in the UK.

Benger, who has a background in turnaround roles across a variety of sectors, recalls being on the phone to between 15 and 20 major customers, and around eight or nine suppliers, to keep them updated as the company unravelled. “They weren’t easy discussions, but most of them were grateful for the upfront communication,” he says,

”There’s been a bit of grief and strife from some people who feel a little bit more hurt than others.”

The feeling of surprise was universal, though. Just five weeks earlier the newly-appointed chief executive told M&C Report about his bullish plans for growth, which included potential acquisitions and even the possibility of direct sales to customers.

Benger says the firm, which was divested from previous owner Heineken in 2010, was in a “good position” towards the end of 2012 after “18 months hard work” under new owner Manfield Partners.

“We’d arrested the sales decline - we had a platform in place to actually start growing sales. We’d increased market share - we had about six months of month-on-month market share growth - and we’d started to see some major customers coming back,” Benger says.

Profitability had also improved after more than £15m was spent on the restructure that saw the company exit a number of sites, invest in a new IT system, and reduce staff numbers. “After that investment, and projecting forward, our forecast was that as we exited 2012 and were just coming into 2013, not only with the profitability enhanced, we would have been cash positive - and in the thin margin wholesale sector, cash is king.”

It was at this time that the firm knew it needed to arrange a fresh round of refinancing to “bring in some extra headroom” and also secure funds for growth.

“We starting having reviews as to who might be targets for us to acquire to start consolidation in that sector,” says Benger. “We talked about where the funding might come from and some tentative discussions had taken place. The plan was to have that in place as we exited 2012.”

So, the £64.5m question: what went wrong? Benger, who joined Waverley initially as programme director responsible for a wide-ranging change management programme in March 2011, identifies three main factors. Firstly, he says that quite soon after he became CEO in the middle of 2012, some major creditors pulled their credit.

“That stripped £6m out of us quite quickly,” he bemoans.

“In isolation that wouldn’t have caused the demise. The other two parameters that coincided with that were… in the period from May to September the weather was awful, trade went down, and the business [across the sector] was down 8-9%.”

The third factor was margins. Analysis in late August found that margins across all its drinks categories and in all its trading regions were down by more than 10%; Benger suggests over capacity in the wholesale industry has meant firms are reluctant to increase prices; “everybody’s trying to hold on and maintain their business,” he stresses.

The three reasons were compounded by Waverley’s use of confidential invoice discounting as its financial model. “That means you sell your debt to a bank, which gives you the money today and then you pay it when you recover.

“As long as you are able to pay [the money] back based on the money you’ve got coming in, you just keep ahead of yourself and you have headroom.

“With the change in the market - in terms of £6m being stripped out, trading being down and gross margin being down - we had to take stock and look forward. That meant we had to forecast down for the end of 2012 and also into 2013. You suddenly have to pay more back than you’re able to generate. That meant that 2013 didn’t look cash positive, so we had to review the strategy.”

The conclusion was to seek a trade sale. “We got quickly into trying to sell the business in early September but time ran out by the end of September,” explains Benger.

“The bank, as they have the right, felt the risk of trading longer would make all the creditors positions worse so they wouldn’t allow us to draw down any more money. As directors, we then had no choice but to move into administration.

“It all unwound very quickly and we had less than four weeks to try and sell the business.”

National rival Matthew Clark was widely reported to be one company to take a serious interest in Waverley. Benger said he couldn’t reveal which firms were involved in discussions, but said: “A lot of the main players looked. Pre-administration, as a board we talked to in excess of 10 potential admirers, and post administration Deloitte probably had dialogue with a further eight; there were two or three that had serious looks.”

“In the right circumstances probably all would have had an interest. But time was not there for us to complete. And if you’ve got what is perceived as a distress sale, you also run the risks of what liabilities the business has, and unless you can do an adequate due diligence there’s always a risk.”

The uncertainty around Waverley’s future had also prompted suppliers to move out. “Within that week I think 30-40% of the business moved elsewhere,” Benger reveals, confirming rumours that some drinks companies did retrieve stock from the depots.

“There was some significant progress made with a few other potential acquirers, but by the end of that week there were no interested parties. It meant the administrator then wound the business up on 7/8 October.”

Were private equity firms involved in discussions? “We talked to a few of those,” Benger says. “We tested out the typical people you’d expect to look at turnaround financing.

“The model wouldn’t work for a private equity investor. There would not have been a return on their investment in two to three years because of the market parameters that we were seeing; our cash position was going to get tougher, it would have required more investment to restructure. So you would have to put more in before you get something out. It was too risky a play for any of them.”

All of this is little comfort to Waverley’s many unsecured creditors and Benger believes most won’t see much of the money.

“I think they’ll get a little bit. I do know the secured creditors were covered, I think, pre-Christmas. There is probably going to be some dispersement to unsecured creditors but I think it’s going to be relatively small if I’m honest.” However, made the point that there’s “some degree of set-off” among some brewer/pub operators companies that may also have owed Waverley money for products.

More positively, Benger believes around half of the c800 people who lost their jobs have since found employment elsewhere, either with other wholesalers, brand owners or retailers, or, in the case of distribution staff, at temping agencies.

He explains: “My view - and the board shared this view - was that at some point when the market consolidates is there’s probably 400 jobs that need to be lost [in drinks wholesaling].

“We didn’t plan for it to as dramatic as 400 in Waverley in one go; it probably would have been spread around a number of players, a more controlled consolidation.”

Could the collapse have been averted, perhaps if the restructure had been pushed through earlier? Benger says moves to do so under its previous owner “only went half way”. He said 85% of the restructure had been completed within 18 months of the new ownership - the number of distribution sites fell from 23 to 12 over that time. Total completion of the restructure had been expected in April 2013.

There were obviously significant restructure costs to contend with, and Benger asks: “If we hadn’t had those would it have been different? We’d have had a few million quid more, but it would have bought us a week more, it wouldn’t have bought us the three months to sell it, in all honesty.”

For Benger, only one thing could have averted the collapse. “The obvious answer in hindsight was to have affected a trade sale earlier. So when we made that decision at the end of 2011 that this is our strategy, which was the point to try and sell it.”

But he said the business was risk-assessed “really robustly” and the company would not have factored in the three factors, the “perfect storm”, which he blames for the decline.

Looking ahead, Benger believes there’s still consolidation to come in the sector. “Whilst in the short term the demise of Waverly will have breathed some oxygen into a number of players… I think we’re now moving into a period where the air is going to get stale again for the wholesaler.”

He predicts the emergence of new rivals to the established companies, from major food wholesalers that have the capacity to expand further into drinks (Brakes, possibly 3663), to cash and carry businesses (Booker) and drinks suppliers that are looking to increase their wholesale capacity (Molson Coors and C&C Group, for example). National wine distributors may also want to diversify as on-trade wine sales decline 6-7% per year, he says. And there’s the competition among third-party logistics suppliers such as Tradeteam and Ooberstock.

“There will be some fall-out this year. I think there will be a number of regional players who will drop out. Whether we get some consolidation with some regionals getting together, I’m not sure. But my view is not all of the regional players will survive.

“And at a national level, and including wine distribution, there has to be consolidation. In the national space at this moment in time, consolidation is required to survive. So I think a few of the bigger names, and some of the smaller regionals, will drop out as we go through 2013.”

After his experience in recent months, you may think Benger has had enough of the industry. The truth is quite the opposite, and he reveals that he’s planning a new venture around brand development for drinks categories such as craft beer and spirits.

“We think there’s a gap in the market. We are working on that at this moment in time. We are not going to rush it; we are going to test it out and try and grow something gradually and work with some of the brand owners of the niche and premium products.”

He adds: “I’ve been in this business now for two years. And I’ve worked in probably a dozen different sectors in my career, and most of those in the last 12 years in restructure. There’s something about the drinks sector that when you get into, people like. I want to keep an active involvement.”

Let’s hope his future involvement in the sector is less fraught than his last one.