How Can a Company Be Too Poor to Survive Being Bought?
My first bicycle was a Raleigh Budgie.
I rode it when I was in infant and early junior school. Then, at Christmas in 1977, I received the bicycle seemingly every British child wanted.
The Raleigh Chopper.
Hoping to own a Raleigh was part of my childhood, as it was for thousands of children in the UK.
Raleigh was founded in Nottingham in 1887. It survived two world wars, mass unemployment, the arrival of the motor car and the decline of British manufacturing.
At its height, its Nottingham factory produced around a million bicycles a year and employed more than 8,000 people.
Generations grew up riding Budgies, Choppers and Grifters.
Yet today, after 139 years, its future is uncertain.
Raleigh’s Dutch parent company, Accell Group, has begun insolvency proceedings after failing to find a buyer or another viable way forward. Its UK and Ireland business has filed a notice of intention to appoint administrators.
The immediate explanation appears straightforward.
Bicycle sales surged during the pandemic. Manufacturers ordered too much stock. Demand subsequently fell and the industry was left with warehouses full of unsold bikes.
But Raleigh’s predicament raises a much more disturbing question.
How can a company become too poor to survive being bought?
The takeover
Accell Group owns Raleigh alongside several other cycling brands, including Haibike, Lapierre, Ghost and Babboe.
In January 2022, Accell accepted a takeover offer from a consortium led by the American private-equity firm KKR and including investment company Teslin.
The offer valued Accell at approximately €1.56 billion. It represented a 26 per cent premium over the company’s previous closing share price and 42 per cent above its average price during the preceding three months.
Accell’s supervisory board unanimously recommended it. Given the substantial premium being offered to shareholders, that recommendation was hardly surprising.
Shareholders were offered an attractive price. KKR saw an opportunity to acquire one of Europe’s largest bicycle manufacturers. Accell’s management gained what it described as a financially strong partner capable of accelerating its growth.
Everyone appeared to be getting what they wanted.
Only four years later, Accell is insolvent.
The pandemic bicycle boom
The acquisition was agreed after an extraordinary period for the bicycle industry.
When the pandemic began, gyms closed, public transport suddenly felt unsafe and many people found themselves with more time at home. Cycling offered exercise, freedom and a socially distanced way to travel.
Demand soared.
Accell’s sales rose by 17 per cent in 2020 to approximately €1.3 billion. E-bike sales grew particularly strongly as people searched for alternatives to cars and public transport.
But this was not an ordinary increase in demand.
It was the product of an extraordinary and temporary disruption to everyday life.
By the time KKR agreed to buy Accell in January 2022, the lockdown lifestyle that had created the cycling boom was already over. People had returned to workplaces, shops, gyms, restaurants, public transport and most of their previous routines.
KKR was not investing during the uncertain opening months of the pandemic. It was acquiring Accell after there had already been ample opportunity to distinguish temporary lockdown behaviour from lasting change.
Accell’s growth was slowing too. Sales through November 2021 were up 4.4 per cent, compared with the 17 per cent increase recorded in 2020.
The warning signs were not hidden.
The company was also struggling with component shortages and rising inventory. The pandemic boom had encouraged manufacturers to order heavily while global supply chains were severely disrupted.
Finished bicycles could not always be completed because individual components were missing. Orders placed during the shortage continued moving through the supply chain even as the exceptional demand that prompted them began to recede.
This was the company KKR agreed to buy.
It was not buying at the beginning of an unpredictable global emergency.
It was buying after the temporary nature of that emergency should already have formed a central part of its valuation.
Was the boom ever sustainable?
I am not suggesting that KKR or Accell’s management could have predicted every event that followed.
Interest rates rose. Consumer finances were squeezed. Accell later faced serious operational problems, including a costly recall of Babboe cargo bikes over safety concerns.
Business always involves uncertainty.
But the central question was hardly impossible to identify.
How much of the cycling boom represented a permanent change in behaviour, and how much existed because millions of people had temporarily been prevented from living normally?
We saw the same question arise with pets.
Pet ownership surged during the pandemic because people were at home, had more time and wanted companionship. It was entirely foreseeable that returning to work would create problems. Dogs that had rarely been left alone could struggle with separation. Some owners would discover that the animal they could manage during lockdown no longer fitted their ordinary life.
Animal charities had long warned about the potential consequences, and the number of dogs being relinquished or abandoned subsequently sure enough increased.
If the temporary nature of pandemic behaviour could be understood in relation to pets, why was the same risk not given greater weight when valuing a bicycle company?
People did not suddenly stop liking dogs after the pandemic.
They stopped living the lives that had made acquiring one seem easy.
Likewise, people did not suddenly decide that bicycles were worthless.
They returned to offices, gyms, public transport, shops and all the other activities competing for their time and money.
The bicycle boom had been real, but demand at that exceptional level was never likely to last.
The responsibility of due diligence
Private-equity firms present themselves as expert investors.
They employ highly paid analysts, advisers, lawyers and industry specialists. Before acquiring a company, they conduct extensive due diligence intended to test its finances, its market, the risks it faces and its future prospects.
That expertise is one of the reasons given for allowing private equity to exert so much control over major businesses.
It is therefore reasonable to ask what KKR’s due diligence concluded about the sustainability of pandemic bicycle sales.
How far did its forecasts expect demand to fall as normal life resumed?
What assumptions were made about the enormous quantity of stock moving through delayed supply chains?
How severely was Accell stress-tested against lower sales, higher interest rates and heavy discounting?
Why was it considered safe to add substantial takeover debt to a business whose recent growth had been produced by circumstances that were already disappearing?
Those questions do not amount to an accusation of misconduct.
KKR may have followed every relevant rule and completed all the due diligence normally expected of it. Its analysts may have identified the risks and simply reached the wrong conclusion.
Investors make mistakes. More often than they like to admit.
The deeper problem is what happened when that mistake was made.
Buying a company with its own money
Most of us assume that when somebody buys a business, they use their own money.
They might borrow some of the purchase price, but we would reasonably expect that debt to remain their responsibility.
They are the buyer. They have chosen the investment. They should carry the risk.
A leveraged buyout works differently.
The investment fund provides some capital but borrows much of the purchase price. The assets and future earnings of the company being acquired then help support and repay that borrowing.
In practical terms, the acquired business can become responsible for servicing much of the debt used to buy it.
Imagine that I decide to buy your house.
I borrow most of the purchase price, secure the debt against your property and tell you that your income must make the repayments.
If everything goes well, I eventually sell the house and keep the profit.
If the repayments become unaffordable, you lose the house.
That is not a perfect legal description of every leveraged buyout. The real structures involve holding companies, lenders, security agreements and complicated movements of money.
But the complexity should not distract us from the underlying reality.
The business can effectively be required to pay for its own acquisition.
Who made money from the takeover?
When Accell was bought, its existing shareholders were offered €58 for every share they owned.
The offer valued the company at approximately €1.56 billion. It was 26 per cent above the previous closing share price and 42 per cent above the average price during the preceding three months.
The shareholders were given what Accell’s board described as “compelling and immediate value”.
For most of them, that value arrived in cash.
One major shareholder, Hoogh Blarick, owned approximately 7.5 per cent of Accell and agreed to sell its holding. At the offer price, those shares were worth roughly €117 million.
Accell’s chief executive and finance director also tendered their smaller personal holdings, worth approximately €1.1 million and €312,000 respectively at the offer price.
Teslin, another major shareholder, sold part of its holding but reinvested most of it in the new ownership structure. It therefore shared in the losses that followed.
The other selling shareholders did not.
They received their money and transferred the future risk to the new owners and, crucially, to Accell itself.
The takeover also generated work for an extensive network of banks, lawyers, financial advisers, brokers and communications specialists.
Goldman Sachs advised the KKR-led consortium and helped provide the debt financing. ABN AMRO also committed funding. Clifford Chance provided legal advice to KKR. Accell, its board and Teslin employed their own legal and financial advisers.
Their fees have not been publicly disclosed, but those professionals were paid for completing the transaction.
Their payment did not depend on Accell remaining solvent four years later.
KKR and its underlying investors subsequently lost heavily, so this was not a successful deal for them. Lenders may also suffer losses through the insolvency process.
But the people now facing the consequences are not limited to those who received the takeover money or chose to finance it.
A small supplier facing an unpaid invoice received no share of the €1.56 billion.
An employee facing redundancy received no takeover premium.
The advisers were paid. The selling shareholders received their cash. The transaction was completed.
The risks arrived later, by which time many of the people who benefited from the sale had already walked away.
The consequences do not stop with Raleigh
KKR and its fellow investors have reportedly lost their entire €1.1 billion equity investment in Accell, as well as hundreds of millions of euros subsequently injected into the group.
This was not a free hit for them.
But their loss does not make the consequences equal.
KKR and its partners chose to invest. The lenders chose to provide finance. Accell’s existing shareholders chose to accept the offer and received a substantial premium for their shares.
Employees did not choose the takeover.
Suppliers did not decide how much debt Accell could safely support. Retailers did not approve the forecasts. Customers did not agree that the company’s future earnings should be used to finance the acquisition.
Yet all of them now face the consequences.
Jobs may disappear. Suppliers may not be paid in full. Retailers and customers face uncertainty. Historic brands may be separated from the businesses and communities that created them.
The investors made the decision.
The consequences spread far beyond them.
When a company this large becomes insolvent, the damage spreads far beyond its own employees.
Some of Accell’s suppliers will be large international manufacturers capable of absorbing a loss.
Others are likely to be small businesses.
Imagine that you run one of them.
You have spent years building a relationship with a stable, historic company. You may employ only a handful of people. You purchase materials, pay wages and perhaps invest in equipment specifically to fulfil its orders.
You have delivered everything you promised.
Then the company is bought by a distant investment fund with no roots in your business, industry or community. Debt is added, assumptions are made about future demand and decisions are taken over which you have no influence.
When those assumptions prove wrong, your invoice may not be paid in full.
The investment fund may lose money from one part of a vast portfolio.
You could lose your business.
Your employees could lose their jobs. If you have borrowed against your home or signed personal guarantees to keep the company operating, you could lose your house.
You did not approve the takeover.
You did not examine the forecasts.
You did not decide how much debt the company could afford.
You simply supplied what a long-established customer ordered and reasonably expected to be paid.
This is what phrases such as “creditor losses” and “insolvency proceedings” conceal.
They turn ruined businesses, lost jobs and threatened homes into entries on a financial statement.
A failure of the system
The problem is not necessarily that somebody broke the rules.
It is that the rules allowed this to happen.
Accell’s shareholders were rational to consider an offer well above the market price.
KKR was rational to seek a return for its investors.
Lenders were rational to earn interest by financing the transaction.
Accell’s management may have genuinely believed that private-equity ownership would help the company expand.
Each participant could have acted lawfully and rationally according to the incentives placed before them.
The collective result was irrational.
A business emerging from a temporary boom was purchased at a premium using a structure that reduced its ability to survive the downturn that followed.
Responsibility was divided among shareholders, directors, investors, advisers and lenders until it became difficult to identify who was accountable for the company itself.
That is the fundamental flaw.
The people making the decisions do not carry all the consequences when those decisions prove wrong.
The problem is not that KKR was allowed to make a mistake. Investors must be free to make mistakes.
The problem is that KKR was allowed to structure its mistake so that Accell, its employees, its suppliers and its brands were forced to share the cost.
Raleigh still sells bicycles
It would be easy to assume that Raleigh is in trouble because nobody buys Raleigh bicycles anymore.
That is not true.
Raleigh remains one of Britain’s most recognisable cycling brands. It continues to sell conventional bikes and e-bikes, and the name itself retains considerable value.
But Raleigh is no longer the dominant manufacturer it once was. British production ended in 2002, competition has intensified and the entire cycling industry has struggled since the pandemic boom ended.
Those are genuine commercial problems.
Companies cannot survive indefinitely on nostalgia. There have been plenty of examples of that in the last 30 years.
But commercial difficulty and financial vulnerability are not the same thing.
A company without excessive debt may be able to reduce production, clear its stock, redesign its range and wait for the market to recover.
A heavily leveraged company must do all those things while continuing to service debt associated with its own acquisition.
The debt does not have to create the downturn.
It only has to remove the company’s ability to survive it.
Too poor to survive being bought
Raleigh may not disappear entirely.
The brand remains valuable, and another company will probably want to acquire it. New bicycles bearing the familiar heron badge may continue to be sold for many years.
But a brand surviving is not the same as a business surviving.
Raleigh endured wars, recessions, technological change and the loss of its British factories.
It may now be threatened by a takeover completed only four years ago, based partly on expectations created by a temporary global emergency.
Perhaps the simplest way to understand what happened is this:
Raleigh did not suddenly forget how to make or sell bicycles.
It may simply have become too poor to survive being bought.
In my next article, I will examine the other companies that have failed after leveraged buyouts, the deals presented as successes and whether any transaction in which a company is made to finance its own purchase should really be called successful.
If you enjoyed this article, you may also find this one interesting:
Raleigh is not the only familiar British business where I have looked at what happens after ownership changes and financial decisions made at the top work their way down to the people doing the work.
My investigation into Evri approaches the same question from a much more personal perspective. I delivered its parcels for nearly six years.
Using my own invoices and delivery records, I examine what happened to my pay as parcel volumes, rates and working arrangements changed, and ask a broader question: when a business creates more value, how much of that value reaches the people actually doing the work?
Read: Who Really Pays for Cheap Delivery?
About the author
Paul Clark is the author of The GOOD Book: A Behavioural Operating System for Escaping Debt and Rebuilding Control and the creator of The GOOD Method. If you enjoyed this article, explore more of his writing in GOOD Thoughts, listen to The GOOD Conversation podcast, or join the GOOD Community to receive new articles, podcast episodes, resources and forthcoming videos by email.