Charterhouse To Buy Inchcape Arm

Charterhouse Development Capital and Bankers Trust is planning a ground-breaking œ120 million US-bond issue to partly finance its œ380 million purchase of Inchcape Testing Services (ITS) from Inchcape.

Although such issues have been employed in US and continental European deals, this is thought to be the first time that a UK-venture capital deal has been financed using cash from the bond markets.

Along with the demerger of insurance broker Bain Hogg, due next month, the sale of ITS forms a key plank in Inchcape's restructuring under Philip Cushing.

ITS was originated as a support function for Inchcape's international trading operations. Based in London, ITS employs about 6,500 staff in more than 80 countries.

 

It tests and certifies product quality, evaluates minerals, and carries out environmental monitoring under contract to companies globally.

During 1995, the company made pre-exceptional operating profits of œ27.8 million on revenues of œ284 million. Almost half of its income is in US dollars.

It has only two comparable competitors: Underwriters Laboratories in the US and Societe Generale de Surveillance, based in Switzerland.

Charterhouse and Bankers Trust beat off six rival bidders to clinch an exceptionally complex deal. The new ITS will have œ90 million of conventional equity. Of that, œ15 million will be in the hands of managers, led by chief executive Richard Nelson. The rest will be owned by Charterhouse, or sold down to client funds.

A further œ50 million of funding will come from Bankers Trust in the form of preferred equity. The remaining funding will come from œ140 million of senior debt and the bond issue.

"The bonds will replace mezzanine funding, commonly used in buy-outs.

Denominated in US dollars and issued by Bankers Trust, they will enable the company to borrow at an annual interest rate of about 11 per cent, a very favourable rate," Stuart Simpson, a Charterhouse director said.

"Thanks to its strong cash flow and rapid sales growth, ITS was well placed for an early flotation in London or New York," Simpson said.

"But, in order to get the benefit of the dramatic growth, every one expects us to hold on to the business for two or three years," Cushing said.

He was delighted with the price achieved for the business. It was well above the œ330 million, originally envisaged by analysts.

Inchcape will declare an exceptional pre-tax profit of œ180 million, arising from the disposal. Proceeds will help reduce Inchcape's borrowings, which were œ510 million, to give a gearing rate of 74 per cent, on June 30.

But the sale of ITS, one of the most profitable companies in the Inchcape portfolio, will dilute earnings per share unless Cushing can enhance the performance of the less profitable businesses. "That is the challenge we face," he said.