Package Deal? Pre-packs can save jobs, but demand transparency

Today's tough market means more pub sector companies are likely to find themselves in financial difficulty to the extent they go into - or seek - administration.

The administration process seeks first and foremost to save a company and protect its assets, hopefully by finding a buyer. Alternatively a sale of the assets is sought; the proceeds distributed to creditors depending on where they sit in the pecking order, with banks - secured creditors - heading this particular queue. The last option is a break-up - liquidation by another name.

One aspect of the administration procedure which has become popular across the pub sector in recent times is the 'pre-pack' deal. Pre-packs are not new, but they are growing in popularity.

How do they work? Parties connected with a business about to go into administration - the administrators themselves, the directors of the company and its banks - will have agreed on things such as asset valuations and a sale price in the run-up to the process commencing.

A pre-pack deal is then completed immediately following the appointment of administrators, and the 'NewCo' is able to carry on trading.

Controversial

The pre-pack process is not without controversy, especially when the party buying the business back is the same one which ran the business when it got into difficulty.

Some observers fear small unsecured creditors, such as suppliers, are left short. Others argue that property landlords are left in the lurch when businesses up and walk away from leases they can't pay for, effectively dumping the liability on someone else. And, as Deutsche Bank analyst and critic of pre-packs Geof Collyer points out, "when people are made redundant the government eventually picks up the tab; in other words, the taxpayer".

Another concern is whether everything has been done to offer a business to the open market, and a deal not just sealed behind closed doors.

Those charged with seeking the best outcome for a business naturally say everything is done to the strictest ethical standards. The issue of transparency is one of the most contentious issues relating to pre-packs, acknowledges Stephen Broome, an administrator covering the pub and leisure sectors with accountants PricewaterhouseCoopers.

"People don't go down the pre-pack route lightly. You have to be able to prove a business has been valued properly. And it will only go [back] to management if it has come up with the best offer," he explains.

Broome accepts pre-packs "are not always easy to stomach", hence recently introduced amendments to the rules governing them, designed to reinforce the notion of best practice. "Some insolvency practitioners might be more… malleable than others," Broome says, "but larger firms can't allow that to happen."

Other specialists agree. Alan Hudson, head of restructuring partner at accountancy firm Ernst & Young, says: "The reality is that we're a heavily regulated profession. We've got to get the best value we can for the business."

Hudson acknowledges that some creditors miss out, but adds that the alternative is for all creditors to lose everything.

He says: "We have a duty to all

creditors. All those connected with businesses are aware of the level of scrutiny applied, the sale process and the independence of valuations."

Besides, Hudson adds, "if we can get 75p in the pound via a pre-pack, that's got to be better than continuing to trade the business [until it breaks up] and only getting 50p in the pound". And any creditor can register a complaint with the accounting authorities if they feel something has gone awry with a particular process, he points out.

And are we likely to see more pre-packs in the pub trade?

"In all probability, yes," says Hudson. "More businesses will get into distress and more will become insolvent. Not all will be bought back though; while many will muddle through there's only so much money out there to fund such businesses."

For the accountants, at least, it could be a bumper year.