STRUGGLING CASHMERE MANUFACTURER Dawson International was forced to call in the administrators after failing to secure its pension’s black hole, becoming another casualty of the ongoing economic difficulties.
Dawson has grappled for over a decade with falling sales, rising cashmere prices and widening costs as it downsized from 12,000 employees at its peak to just 200. The business turned to the Pensions Regulator and Pensions Protection Fund (PPF) to secure its £129m deficit but both rejected the proposal in a move that the chairman of Dawson International branded ‘deplorable’.
The PPF argued that the compensation being offered by Dawson International – 33% of the group’s share capital as well as an upfront cash payment – was inadequate, sparking outrage from Dawson International which claimed its assets were significantly undervalued.
Whatever the true state of play, it could have been so different for Dawson International and the lessons that Dawson failed to learn should be heeded by finance directors and senior management at companies across a range of sectors. One of these lessons is to leverage other, healthier, brands within a group to balance out the finances of other struggling divisions – an option that was certainly open to Dawson International.
Dawson International is the parent company of US and UK trading divisions; the UK division traded under the name of Barrie Knitwear, and the US group traded under Dawson Forte. KPMG has stressed that Dawson Forte is ‘well funded’ and will continue to trade, yet the UK arm has been put up for sale despite trading profitably.
Barrie has considerable value and boasts a global consumer base, 100 year heritage and a strong brand portfolio including Barrie, Glenmac, John Laing and Kinross. Due to the profitability of Dawson Forte & Barrie, one possible solution for Dawson International could have been to secure its pension deficit through the use of non-cash asset pension funding. The firm used to be one of the biggest players in the industry and despite selling off several brands including Pringle, it has great heritage and a strong brand portfolio.
Like other companies struggling before them, the group could have separated its strongest brands to create a pension funding partnership (PFP) and then transferred the assets into special purpose vehicles. The brands could then be leased back to the company for a fee, bridging the pensions deficit gap and offering security for the pension fund. Using intellectual property such as a brand in this scheme can be particularly effective. Brands and intellectual property may be the key drivers of future revenues and tangible assets may already be secured under banking covenants.
This isn’t just a theoretical scheme – it works in practice and has played a part in stabilising similar struggling groups in the past. One such example is leading travel brand TUI Travel, which secured its pension scheme with its leading brands Thomson and First Choice back in May 2011, using the process outlined above. The financials give a good indicator of the scheme’s success with TUI announcing £85m profits for the business year ending September 2011, up from a £123m loss the previous year. Whilst this of course cannot be entirely attributed to the new pension scheme, it was certainly a strong influencing factor. In the case of TUI Travel, creating a PFP allowed the group to focus on its existing assets to decrease debts and restructure other aspects of the company. In the case of Dawson, the trading arms had been turning a profit and this success could have been capitalised on to improve the deficit position.
The plight of Dawson International illustrates the problem facing a whole range of businesses today, and the need for a contemporary solution that works. The decision from the PPF and Pensions Regulator is both perplexing and concerning- once again it would appear that a legacy pension deficit has brought about the separation of the company from its pension scheme via an administration process.
I’m unsure how this decision will help add any value to all the stakeholders concerned when it comes to selling the business through administration; it is the company that provides the pension scheme with the covenant so any buyer of Dawson International will purchase the assets on a distressed discounted basis which does not reflect the true value of the assets and the pension liabilities will be left with the taxpayer.
Intangible assets hold considerable value, and they can have real tangible benefits when harnessed in the right way. Those businesses with pensions deficits should take immediate action to rectify the situation and utilise more successful brand within their business to plug the gap in a way that brings tangible results. Relying on the PPF and the Pensions Regulator to bail your pension scheme out is not a sure bet.
Stuart Whitwell is joint managing director at brand valuation consultancy Intangible Business