-- Margaret Doyle is a Reuters columnist. The opinions expressed are her own --
By Margaret Doyle
LONDON, April 6 (Reuters) - Banks generally get the fuzzy end of the lollipop when private equity deals go wrong. That's because they have most to lose. In recent years banks put up around 70 percent of the capital used to back buyouts.
But in one case at least, the bankers have had their revenge. Lloyds and AIB, bankers to Robert Dyas, have outsmarted Change Capital Partners (CCP), a buyout group that purchased the British hardware store chain five years ago.
Unusually, in this case CCP seems to have had more to lose than the bankers. In addition to owning the equity, it lent the company 46 million pounds of subordinated debt. The banks are on the hook for just 25 million pounds of senior loans (CCP had paid back 6 million pounds of capital).
Despite this fact, CCP tried to play hardball with the banks when Dyas ran into trouble last year after breaching the covenants on its debt. CCP offered to let the banks swap debt for equity. It also offered to inject further equity itself.
When the banks wouldn't play ball, CCP got tough. As recently as Friday, Roger Holmes, the ex-Marks & Spencer boss who is a managing director at CCP, wrote to Eric Daniels, chief executive of Lloyds, threatening to put Dyas into administration because of the banks' intransigence.
Unfortunately for Holmes, the banks had other plans. They proposed another solution, namely for CCP to sell its entire interest -- debt and equity -- to the Dyas management team for less than 1 million pounds (a writedown of more than 50 million pounds).
Of course, CCP could press the button on administration if it wished. But as the business is probably not worth much more than the 25 million pounds owed to the banks, the buyout firm would be left with nothing. Moreover, as Dyas has 1,250 employees whose futures might be jeopardised by administration, Holmes and his boss, another ex M&S bigwig, Luc Vandevelde, risked joining Sir Fred Goodwin in the financiers' hall of shame if they went that route.
The banks' hardline stance has taken CCP off-guard. The buyout firm now says that it is relieved the company has been saved -- even if this is at its own expense -- while Lloyds and AIB get to notch up a victory. Sadly for the banks -- and the taxpayers who fund them -- the sort of capital structure that supported Dyas (which allowed them to flex their muscles) is unusual. So such triumphs are likely to prove rare.
-- At the time of publication, Margaret Doyle did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. For previous columns, Reuters' customers can click on
(Author biography - ((Editing by Charles Dick))