The loss-making MFI retail chain was yesterday sold for a nominal sum of £1 to a private equity firm which is promising to return the 200-strong operation to its former glory. As a result of the long-awaited transaction, the stock market-listed company MFI is changing its name to Galiform and planning to embark upon a rapid expansion of its builders merchants, Howden.
MFI's shares jumped 11.5p to 99p on the welcome news that the deal with Merchant Equity Partners, a private equity firm founded by City banker Henry Jackson, had finally been struck. The company is paying a "dowry" of £126m, including £52m paid by customers as deposits for their orders, to rid itself of the operation, keeping the pension liabilities and expecting a net exceptional loss of £180m on the deal.
MFI's retail business, which is the UK's biggest furniture retailer, specialises in flat pack furniture aimed at the DIY market which, the company argues, is now falling victim to DFY - done for you.
The break-up of the MFI group is the result of a review by Matthew Ingle, who has been chief executive for a year since John Hancock was ousted with a £1.4m payoff. Mr Ingle came from the Howden side of the business, which specialises in ready-built kit for builders. He now wants to expand it from 362 outlets to over 500. "Howden is a growing business. One [part of the market] wants rigid boxes and one wants flat packs. What I do know is that builders don't want flat pack," said Mr Ingle.
He also acknowledged that MFI's problems were not just about flat pack versus readymade. "The overwhelming challenges that MFI faces are to serve the customers it gets and the opportunity to reduce fixed costs." The retail arm's property costs have risen from £72m in 2003 to £96m in 2005. It made £50m of operating losses in 2005. "This is a good deal. The cost of £74m compares with a loss of £50m last year," he said.
MFI is shelling out £74m in funding to MEP as well as the deposits put down by customers. But, if the private equity buyers sell on MFI in the next five years, what will become Galiform will be entitled to 5% of any proceeds over £300m.
MFI is the first investment for MEP, a private equity fund set up by Mr Jackson along with David Hamid, a former chief executive of Halfords and John von Spreckelsen, one-time chairman of Somerfield. Mr Hamid will now chair MFI retail and Gary Favell, former chief executive of Wyevale Garden Centres, will be chief executive.
The bidders gave few clues to their plans for the retail arm other than to indicate they want to expand. Mr Jackson said: "We are pleased to have agreed terms. We are enthusiastic about the MFI brand and look forward to growing the retail business with a focus on quality and service."
Customers awaiting deliveries from the company should not be affected by the transaction, MFI said.
Even with the sale of the retail business, the group admitted that the continuing business would "record a modest trading loss" this financial year.
Shareholders will be asked to approve the transaction on October 16.
Backstory
Mullard Furniture Industries was begun in 1964 by Donald Searle and Noel Lister, who sold government surplus stock after the second world war. Mullard was the maiden name of Searle's wife. Originally mail order, it opened stores to sell flat-pack kitchens and bathrooms, helped by Margaret Thatcher's council house sell-off. At one point, one in three Sunday lunches was said to be made in their kitchens and 60% of children conceived in an MFI bedroom. It declined as rivals such as Ikea moved into its market but crucially MFI failed to maintain customer service.