i-level pays a painful price for taking on £32m debt to fund founder sell-out
The collapse of digital media agency i-level provides a stark warning to all those who believe that selling out to private equity investors at top dollar will provide both a chunky sum of cash to the vendors and a prosperous future for the business they have sold.
ECI Partners bought a 60% stake in the i-level group in April 2008 in a deal that put a value of £46.5 million on the business founded by Charlie Dobres and Andrew Walmsley. The structure of the transaction included loading the group with £32 million of debt, much of which carried an interest coupon of 12%. In other words the group had to earn pre-tax profits of at least £3 million to cover interest charges alone.
Meeting that annual interest cost – and generating value beyond it – relied inevitably on continuing growth, something that i-level had achieved fairly consistently in the past. But the advertising industry is always vulnerable to economic downturns and/or the sudden loss of clients, which is why the more prudent agencies ensure they keep a piggy-bank full of cash to cope with such an eventuality. Indeed i-level had always followed that policy until the time of the ECI deal.
It has been argued that the interest cost imposed by the ECI deal was only a paper item because the company did not have to settle that obligation in cash until ECI disposed of its controlling interest. Clearly that would have minimised any cash outflow at the time, but the plain truth remains that the interest obligation to ECI was real, it accrued annually, it was secured by a charge over the company’s assets and was so recorded in the company’s accounts. Only when the group’s financial position had deteriorated in January this year was the interest debt converted into shares. Equally important, the deal converted a cash rich balance sheet into a heavily indebted one. That could have made it increasingly hard for the company to borrow funds from a bank and more prone to insolvency.
Unluckily for i-level and its employees, the clients started to leave at the same time as the heavy interest charges were arriving. Turnover fell by 15% from over £100 million in the year to 31 March 2008 to about £85 million in the year to 31 March 2009, and that was before the COI business was lost. In its first year of private equity ownership the group suffered a loss of £2.4 million and its balance sheet changed dramatically. By 31 March 2009 short-term trading liabilities exceeded readily realisable assets by £9.6 million. And while recent reports have mentioned that the group had a load of cash when the administrators pounced, it wasn’t spare cash kept for a rainy day but simply clients’ media payments en route to media owners.
Chief executive Stephen Rust joined the group at the time of the ECI deal and helped negotiate it, having previously sold the Search Works to TradeDoubler at a juicy price that proved less easy to justify after the event (see TradeDoubler’s balance sheet restored after Search Works write-down). Sadly he, along with his respected chairman David Pattison and some other directors, are all likely to be out of a job as their board positions were terminated today.
i-level is not the first digital agency to have fallen into a financial snake-pit after gaining backing from private equity investors. Latitude Group went into administration last December after a debt-laden private equity deal engineered by Vitruvian Partners came unstuck (see Latitude lost over £10m before going into administration).
© Fintellect Ltd
