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City Link Private Equity Firm Hopes to Recover £20m Despite Job Losses

April 11, 2016

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While administrators announce substantial new year job cuts, City Link’s owner Better Capital tells stakeholders it expects to recoup 50% of investments

The private equity firm behind City Link expects to recover £20m from the collapsed parcel carrier as it was confirmed thousands of employees would lose their job on New Year’s Eve.

Although no redundancies were announced formally on Monday, administrators at Ernst & Young (EY) said they had briefed staff at City Link’s depots around the country that a “substantial” round of cuts would take place on 31 December. The company, which employs 2,727 staff as well as 1,000 self-employed drivers and agency workers, has stopped taking parcels but has opened its warehouses in order to allow customers to retrieve their parcels.

Some staff will be retained into the new year to handle the 40,000 parcels still in its possession, EY said. The Coventry-based firm has three additional transport hubs – in West Drayton, Peterborough and Warrington – as well as 53 smaller depots throughout the UK.

City Link’s owner Better Capital, which is run by veteran private equity investor John Moulton, told its shareholders on Monday that it expected to recoup around half the £40m it had ploughed into the troubled business it bought for £1 in 2013.

In the autumn Better Capital wrote down the value of its investment in City Link to £20m – a figure based on how much it would recover if the business was liquidated. It stood by that figure in a statement issued to the stock exchange.

Better Capital’s admission that it would recover some of its funds caused anger as EY confirmed staff would need to lodge their claims with the government-backed redundancy payments service. It is unlikely that the large number of self-employed or agency workers that City Link relied on will receive any compensation as the statutory scheme does not cover payments due to self-employed contractors.

City analysts were less optimistic that Better Capital would recover its £20m as its shares fell 2.5% on Monday, suggesting investors believe its losses could be greater. Because it invested in City Link through a series of loans, Better Capital is classed as a secured creditor and is therefore at the front of the queue for recompense, ahead of staff and suppliers. The majority of the company’s properties and vans are thought to be leased, with funds raised expected to come from the sale of machinery and other plant to rival operators. The demise of City Link was deemed good news for Royal Mail with its shares gaining more than 4% to make it the biggest riser in the FTSE 100 on Monday.

“We would like to be more conservative than this [£20m figure] with the expectation of a significant number of claims on the remaining assets of City Link,” said Liberium analyst, Rob Jones, who added that thought the administration could be “more lengthy and thus more costly than originally anticipated”.

Administrators at EY were formally appointed on Christmas Eve, with many workers learning about their employers’ financial problems on Christmas Day.

The RMT union has urged the business secretary, Vince Cable, to rescue the company but Moulton said the Department for Business was aware of City Link’s collapse before Christmas and did not request a meeting to discuss its future. It had proved impossible to save City Link, he said, stressing that the company’s directors would have been guilty of a criminal offence had they not filed for insolvency when it became clear “a couple of days before Christmas” that the firm would collapse. He estimated the company needed an injection of about £100m to turn it around.

“We are very sorry about the failure of City Link and we’re very sorry about the horrible effects that follow for the workforce and contractors,” said Moulton in response to claims the business had been mismanaged. “I’m afraid that is the result of the company failing, nothing more and nothing less. The company was not viable.”

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