Eddie Stobart and its fleet of near 3,000 green and red trucks managed to escape a near fatal financial crash this month.
But with a rescue offer that loads more costly debt to the struggling business, and accounts still locked after almost six months, the trucking group remains on rocky ground.
Eddie Stobart has returned to the hands of Dbay, the Isle of Man-based private equity group, swapping a controlling stake in its operations for a £55m high interest-rate loan simply to survive the busy Christmas period.
The sale marks the latest twist in its 50-year journey in which its distinctive trucks became a regular feature on the UK’s motorways — at one point, spawning its own TV series, toy range and fan club.
Some have blamed Dbay, which owned the group until the 2017 flotation, when it sold most of its stake alongside Stobart Group, which specialises in infrastructure and support services, for £150m.
TVFB, the company controlled by Andrew Tinkler, the former Eddie Stobart boss who had made a rival offer, said there was too much debt and a reduction in operating margins under its ownership. Unite, the workers’ union, accused Dbay of engaging in “bandit capitalism”.
Those close to Dbay say Eddie Stobart was in good health when it floated, with earnings before interest and tax of £48.5m and net debt at £109.5m in 2017, its first full-year results. But just two years later the company had hit the skids — net debt almost doubling, and the company forecasting earnings of £2m at most for 2019.
So why did the company fall so quickly? Eddie Stobart had entered this year confidently, talking of its strong position given the need to move the UK’s internet shopping around the motorways. The 2018 dividend grew to a bumper £23.9m — especially bullish given this exceeded the £23.6m made in pre-tax profits that year, and despite adjusted free cash from operations falling to just £1.7m.
The first sign of a problem only started to emerge in July, when a review by new chief financial officer Anoop Kang led to a writedown in earnings for the past two years “relating to the lease accounting involving four legacy sites”.
By August, chief executive Alex Laffey had left, and the review was more damning: earnings would be significantly lower for its half year, it said. Results were delayed, and shares suspended.
Further writedowns came in September. The company had grown too fast — revenue growth came with set up activities, it said, that had placed “substantial demands” on working capital, compounding a reduction in earnings, poor cash collection and the — now scrapped — high dividend. Net debt leapt as the company became more reliant on its banks.
“The business had grown too rapidly,” said one person familiar with the company’s operations.
Trucking is a business that requires a strong command of cash flow — customer payments often come months after the need to cover drivers and fuel. Too rapid an expansion meant that cash was quickly spent. One person close to the company said that some contracts agreed for unprofitable routes outside its core network exacerbated this problem.
Crucially, the company now suffered from how the board — and different auditors — accounted for income from a growing number of property deals. These had helped maintain profitability and finance its expansion, according to one person with knowledge of the group, whatever was happening within the core business.
Since 2016, a material proportion of profits had been made from property transactions. Eddie Stobart acted as the anchor tenant on new developments and took a consultancy fee as these warehouses were sold on to investors. Those familiar with the company’s operations said some deals were struck without tenants, which meant the loss of income and a scramble to fill the empty space. “You are gambling on the future,” said one person.
The company had been booking the income from property deals in the year struck — but its new CFO, alongside a new auditor, decided that a more appropriate way to account for this would be over the unexpired lease length, leading to profit adjustments.
Such income accounted for £33m in earnings before interest and tax in 2018 — more than half the total that year of £55.3m. This figure almost doubled from £17m in 2017 and £13m from the years before. This — along with the projected £12m in the first half of 2019 — would be revised in its accounts, it said, instead booked over multiyear leases.
“Too much money was coming from property fees and they were taking upfront payments,” said one investor.
Behind the scenes, the relationship with its auditors grew troubled. KPMG resigned in November last year, blaming a relationship breakdown with management caused by difficulties in obtaining evidence during the audit of the 2017 account.
Its replacement PwC, having signed off the full-year 2018 accounts, quickly ran into similar issues. One shareholder said the reason that rival plans for an equity raising failed was because of the suspension in shares — blaming PwC for “dithering” over the long-delayed interim results.
But a person familiar with PwC’s position said Eddie Stobart had not yet supplied key financial documents, causing the delay. Eddie Stobart declined to comment.
Amid the accounting confusion in September, Dbay made a preliminary expression of interest. By November, with the company now warning of “unsustainable” net debt of £200m, Dbay offered its interest-heavy solution, and promising a “return to its previous strength”.
With sales suspended and desperate for cash, the company agreed to recommend the offer. Shareholders, despite disquiet over the prospect of becoming simply passengers with a minority stake in the business, fell behind the management. The keys to Eddie Stobart returned to the hands of Dbay.
Additional reporting by Tabby Kinder