What the backers will expect from Gab's management team in these difficult times
Freed from the strings of overseas control, the likely MBO of Gab Robins UK arm is a golden opportunity for its directors to prove they can keep the company posting healthy profits. The 2007 pre-tax profit of £2.7m was a remarkable turnaround for a company that only two years earlier had the same result £6.5m in the red. A big question will be whether the company can keep its pension deficit under control, something it has worked hard on over the past three years.
Perhaps an even bigger question people will be asking, is how the MBO is funded and what they will demand of Gab’s management? The most likely backers will be a private equity group. Whereas management have a long-time vested interested in their business plans, private equity groups frequently like to maximise their returns within five years, with minimal risk, and then depart. The two differing aims could put pressure on the company.
Other backing sources could be banks. Even in this distressed environment, they have shown their willingness to back the insurance industry. Late last year, Patrick Smith bought Equity Insurance Brokers with help from a £175m funding facility from Lloyd’s TSB. Although perhaps harder to secure, the MBO may like the idea of a bank that falls in line with their longer-term view of the business.
Finally, you have private investors. Entrepreneur Tom Duggan and Towergate boss Peter Cullum were understood to have backed the £23.5m MBO of Hastings.
But whatever the source, you can expect the management to put a hefty share of their wealth on the line. It’s not unusual to see directors remortgage their homes. Ultimately, their financial commitment ties them into the success of the company, creating a team that should all be pulling in the same direction, something backers like to see. The finer print will be revealed when the deal is sealed, probably on Friday.
What will the future hold? The management have already shown their capability by increasing profits and bringing the pension deficit under better control. Every business is feeling the bite of the economic downturn, but the insurance industry is not yet badly infected by the contagion. There is every chance Gab can continue to grow within the parameters set by its backers.