Now Capitalized Prudently
A decade ago this entry chronicling the incredible chase for the UK’s NCP Group’s car parks by private equity was published. Macquarie, it was suggested, would repent long for their poor timing and dear price paid.

What was the denouement?

Having paid £790m for it in 2007 Macquarie held NCP in its Guernsey-registered MEIF 2 structure. MEIF 2 was backed by institutional investors mainly, it appears, pension funds.

Macquarie then watched the economy melt in the heat of the credit crunch, the congestion charge in London eat into parking demand and the servicing of the £500m debt it took on to finance the deal become impossible to meet.

By 2012, despite at least two capital increases from Macquarie, net liabilities at NCP rose to over £634m. Pre-tax losses reigned and NCP’s debt on the secondary loan market was trading at under 15% of face value. With loan covenants under threat protracted negotiations with lenders and the majority landlord (one set of prior owners - Cinven - having sold and leased back the entire property portfolio) led to a rescue deal.

At what cost? Lenders wrote off £349m of loans in exchange for 15% of NCP’s equity; the landlord, Israeli firm Delek under pressure from its own bankers, reduced rents by £10.5m per annum on the understanding that the deal would sort out the long term debt quandary of NCP; and Macquarie recapitalized NCP by another £50m – on top of writing off £298m of its own loans.

That comes to the tidy sum of £697m. But at least it stopped the rot, right? Erm, sort of.

Last December a further refinancing closed. With NCP then showing net profit around £28m on turnover of £227m Macquarie had sought to refinance a £140m loan package. They settled for £115m and the injection of another £20m of their own capital to make up the difference.

The balance sheet is now healthy but Macquarie's MEIF 2 was designed to invest in businesses that “generate stable cash flows over the long term”. That label for NCP may no longer be viable.

When it was acquired in 2007 NCP turned over north of £300m for the car park piece of the deal that Macquarie bought (vendor 3i having stripped out the services business for themselves). That has slid to £203m as of March, 2016. Can it be increased or at least held steady? Maybe - but it is worth noting that the market value of the properties leased by Macquarie represent an ongoing threat to the effort.

In September, 2016 Blackstone sold 88 NCP sites for £500m. Some of these are clearly more profitable as conversion and development assets. There is a precedent in the single West End site Blackstone sold in 2015 for around £70m. Although the lease in that case runs to 2037 – not very far away for a pension fund investor - it was acquired primarily to end a planning dispute over a neighbouring luxury residential development owned by the same buyer. Comparable deals will erode NCP revenue sources.

With the debt side stable and £187m of net assets now on the balance sheet a sensible course of action in a fragmented European parking market would be to offload NCP to a specialist, stable competitor looking for greater scale. The Netherlands' Q-Park, Spain's Empark or France's Vinci Park fit the bill - and each already has a UK presence.

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Monday, January 16, 2017 | 0 comments »

“It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive”
Times change and when JM Keynes wrote that in The General Theory of Employment, Interest and Money he did not anticipate the rise of bookmakers like William Hill, Ladbrokes, BetFair/Paddy Power and so forth.

Combined with the power of the internet and idiot-proof betting and trading algos (which is not a comment on the effectiveness of those same algos) the behaviour of the share prices of these companies came to bear an uncanny resemblance to that of the London Stock Exchange (LSE).

Here, for example, is a plot of the William Hill (in red) vs LSE share price between April 2009 and July 2013:

lse wmh apr 2009 to jul 2013

Very positive correlation. It brings to mind the the more famous casino quote from chapter 12 of The General Theory:

“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”
What, then, to make of the same graphic (with LSE now in red) since August 2013?

lse wmh jul 2013 to jan 2017

Now they show negative correlation. All clear sailing ahead?

It is perhaps a sector comment (for this is not limited to William Hill) and nothing more. But given that the DNA of the modern bookmaker is now part-bourse (they take financial wagers in addition to bets on just about anything else) it gives pause for thought on the possible future direction of the broader market.

After all, central bank actions have not bestowed the same benefits on the clients of bookmakers that they have on those of stock markets.

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