New Heights: Toby Ash
The furniture chain entrepreneur explains why the opportunity to ‘steal’ bigger brand Sofa Workshop Direct from a failing MFI was too good to pass up
“I have to pinch myself. I'm now director of the combined New Heights and Sofa Workshop Group. I'll be invited to all the cool parties.”
You don't need to be told that Toby Ash, co-founder of middle to upper-end furniture chain New Heights, has his tongue firmly lodged in his cheek when he says this, but it's obvious to anyone that he's a happy man. After all, he and business partner and company managing director Gareth Williams have just completed one of the most eye-catching deals of the year. It's not often you hear of a well-known, and let's be honest, considerably bigger, consumer brand being taken over by a younger, smaller player. The target, Sofa Workshop, was set up by entrepreneur Andrew Cussins in 1985. In 2002, one of the UK's major fitted furniture suppliers, MFI, paid a princely £12.6m for it as part of, what now appears, an ill-conceived shopping spree.
Four years on, MFI was struggling and looking to sell non-core assets to focus on its joinery trade business and manufacturing operation. In September it sold its 200-store retail arm for £1, with the purchaser Merchant Equity Partners (MEP) due to receive a £53.1m ‘incentive' next year and a further £12m in 2008 from MFI if it matches the money – a dire, desperate situation, and no mistake.
But MFI's pain has proved New Heights' gain. The Sofa Workshop brand was left out of the MEP deal. With 32 stores spread around the country in key locations, a middle to upper-end clientele, turnover of £25m and a complementary product offering, it was manna from heaven for Williams and Ash. And they picked it up for a snip at £1.8m.
Striking the deal
While it's clear MFI wanted out, it wasn't cut and dried. Unusually perhaps, given the perceived informality of the communication, it started with a speculative email. “We noticed last year that MFI was having difficulties in supply chain and sales figures,” explains Ash. “It had suffered double-digit falls in like-for-like sales. I just thought I'd pop off an email to MFI's chief executive saying: ‘Are there any stores we can have?' Nothing happened, so I sent it again and he got back saying: ‘I'll be in touch in the New Year.' When they did get back, it was to say the whole business was up for sale.”
Perhaps not the most conventional approach, but it worked. MFI was well aware Sofa Workshop had never really fitted its portfolio, representing a discernible shift away from its mass-market customer base. Independently, the sofa business had performed well enough and had given MFI scope to sell beyond kitchens, but the natural synergies were lacking.
Bespoke sofas and flatpack kitchens require an entirely different approach at the point of manufacture, and to have imposed the MFI brand upon Sofa Workshop would only have diluted its appeal to the more affluent buyer.
With a quick exit sought, Ash and Williams returned to existing shareholders. The investors concerned are not short of a bob or two. Tony and Lisa Wilkinson are senior members of the family that owns £1.2bn turnover and 250-store general goods giant Wilkinson, more commonly known as Wilkos. They used close to £1.6m from their family trust to secure a minority stake after a chance meeting. “We'd been round the venture capitalists, but found the idea hard to swallow,” recalls Ash. “Then at the tail-end of 2004 our chairman was at the Welsh Farming Show and got talking to Tony Wilkinson who was a customer, as was Lisa.”
It has proved to be a fruitful coincidence. When it came to Sofa Workshop, Ash and Williams knew the existing shareholder base couldn't be taken for granted, but, thankfully for the pair, any potential flies in the ointment were not insurmountable and existing shareholders recognised the potential.
The due diligence process
With acquisitions though, it's rarely simple. MFI opted for an auction and original founder Cussins was also rumoured to be keen. “They're a big plc, so have to do such things,” says Ash. “In hindsight, it was great for us, because if we'd bought the business earlier this year we'd have paid an awful lot more for it than we did in October.” Every cloud…
“They spent a huge amount with KPMG on producing fantastic brochures and documents, which had lots of lovely pictures,” he continues. “We met with management, did due diligence and submitted our final bids in August.”
The meeting with management – and MFI's corporate advisers – Ash describes as being like “going on a date and bringing the mother-in-law along”. In contrast, New Heights' financial director Tim Pascoe and Williams carried out all the company's negotiations.
On the plus side, due diligence concerns about supply chain problems were soon allayed. One of Sofa Workshop's three ranges, which accounted for 25% of sales in 2005, had experienced issues with supply and quality, and a Wales-based manufacturer was closed down as a result. The new Polish manufacturer, on closer inspection, has subsequently reduced lead times from 16 weeks to five and was already meeting quality expectations, raising total sales on the range to 22% from a mere 10%. “In the end there wasn't an awful lot to sort out,” says Ash.
The deal proceeded and it's an amusing aside that MFI requested not to be mentioned in any press releases following completion, despite the fact it was a matter of public record and, as a plc, it would be announced to the City anyway.
Natural deal synergies
With Ash basking post deal in New Heights' Putney store, it's easy to see why he's so happy. You could hardly find a better match. The brands both retail bespoke furniture made exclusively for them by craftsmen, largely British in Sofa Workshop's case, using solid woods. The acquired company's customers can choose fabrics, cushions, size and style to suit their tastes. New Heights' furniture can be made to measure – in many cases to the nearest centimetre.
Products are complementary – Sofa Workshop has a 20-year track record and authority in upholstery and leather. New Heights focuses on bedroom, dining and living room furniture, without an emphasis on seating. The customer demographic is near-identical. The store profile is similar, focusing on visible, secondary locations. In fact, this is one area in which Sofa Workshop stands out above New Heights. “It has locations you could hardly buy for love nor money, like Tottenham Court Road, Deansgate in Manchester and the King's Road” says Ash.
Sofa Workshop's long-standing senior management also stood out, with the company boasting clear strengths in marketing, the supply chain, product design, accounts and retail. Only the incumbent managing director, installed by MFI, has departed.
You might think there would be obvious cost savings to be had. There are, but it was never the focus. “We didn't sell the plan of buying Sofa Workshop on savings by synergies,” explains Ash. “There are likely to be savings in a number of areas. And there are cross-marketing benefits, introducing New Heights to Sofa Workshop shoppers and vice versa.” So no need for a rebrand then.
Williams and Ash are excited about creating “a homeware retail destination, which is quite an American concept”. In fact, Ash will be visiting New York with Sofa Workshop's design director and marketing director to look at how retailers there make a brand umbrella concept work. This offers potentially one of the biggest wins. “The availability and price of retail property are two of the biggest constraints on growth,” he says. “There's a lot of win for us in taking a bigger unit and splitting it in two. You pay a lot for the first 3,000 square feet, but only a third again for the second.”
One of the toughest challenges of any acquisition is getting the integration right. The New Heights management started well, committing to a 100-day plan, visits of every Sofa Workshop store, and acting on collated and prioritised information in the New Year. They also gave it a human touch. “When the deal first went through – in contrast to the deal in 2002, when MFI sent a fax to all stores to say the company had been sold – we sent a long email to everyone in the business. We also popped into a few stores the day after and asked lots of questions along the lines of ‘what do we do well?' and ‘what could we do better?' It reassured people.”
The email acknowledged the “gruelling and unsettling [sale] process” and thanked the Sofa Workshop management team for the hard work it had put in. It then went on to explain what staff have to look forward to, such as returning to stand-alone status, no radical changes, working with the existing team, and being entrepreneur rather than plc-led. There was also a call to arms: “We want people to understand that we are the brands to shop with if you're looking for quality furniture and brilliant service,” said the email.
It also gave background on the purchasers and reassured staff the brands would remain separate. And it signed off with mobile numbers for both Ash and Williams. Overall, it's not a bad format to follow. As Ash says: “The last thing we want is a political company. We're always going to review, but existing management appreciate a new perspective. And the great thing is, we're pushing against an open door.”
New Heights: An overview
New Heights may be familiar to you already. You were introduced to the business when we ?adopted? it back in 2002, with the promise of intermittent catch-ups to see how our fast-rising companies would deal with inevitable growing pains. It had all the right ingredients ? fast-growth potential, a clear niche, great management.
Set up in 1999 by Toby Ash, Gareth Williams and Richard Hepworth, the north London-based retailer offered professionals sick of IKEA flatpacks real wood, quality furniture in sophisticated styles.
It?s not all been plain sailing. The business hit profit in 2002, but ?dipped out? in 2005, when ?consumer sentiment fell off the cliff?. ?People started worrying about the property market and transactions slowed,? says Ash. In fact, property transactions that year hit a 30-year low, he adds, and moving house, as you?d expect, is a major trigger for furniture purchases. Furniture Land, Courts and Feather & Black went to the wall.
But ?11m-turnover New Heights endured and now has 17 stores with plans for 30, from Brighton in the south to Glasgow in the north. Property market fears remain, but with record City bonuses due, it has good reason to be bullish.
Company: New Heights & Sofa Workshop Group
Founders: Gareth Williams (group CEO), Toby Ash (group business development director), Richard Hepworth (New Heights supply chain director)
Proposition: Middle to upper-end furniture
Turnover 2005: ?36m