Leveraging the Woolworth Property Assets

When Paternoster's takeover of F.W. Woolworth hit the news on 1 October 1982 many pundits considered it to be a gamble with a high likelihood of failure.

Seventeen years later in 1999, the Kingfisher Group CEO Sir Geoffrey Mulcahy, who had been part of the original Consortium, revealed that the speed of the American acceptance of the bid was unexpected. It had presented a big challenge.

The Consortium was underwritten by £310m from the Merchant Bankers of Charterhouse Jaffert, which had been secured against a detailed business plan. This envisaged selling a number of freehold stores to pay down the debt, and was meticulously planned in advance. The ruthless approach to these disposals was in marked contrast to the sentimentality of the previous management.

Two years earlier F. W. Woolworth had bought B&Q, selling two major freehold Woolworth stores to raise the necessary funds. Board Directors had been strongly challenged by Store Managers about the move and were accused of losing confidence in the variety store formula. Executives had answered that they planned to continue to invest in Woolworth openings while also diversifying into new markets. They had pointed out that they had consistently rejected advice from the USA to sell and lease back their more valuable freehold properties. Despite the criticism the old Board had closed further Woolworth stores to fund new acquisitions to accelerate the growth at B&Q.

The previous Board had believed that they held the Properties in trust for future generations and, as a result, had an untargeted approach to investment decisions. This is illustrated by a 1982 article in the in-house management newspaper with the headline "Spreading the money around":

"Where we have a highly successful store in a city centre, we will continue to spend money on refurbishment. Norwich is a good example of that. The same applies to Woolco, as is evidenced by what is happening in Bournemouth." ... "Managers are concerned about the upkeep of their stores but the fact is that we are doing more refurbishments in 1982 than we did last year." .... "The current thinking is perhaps to spread the money round a bit more. This is likely to be achieved by planning less expensive refurbishments, conversions and extensions, and by being flexible about the types of store where they may be carried out" .... "Perhaps in the future the analysis might be more clearly based on profit potential."

This caution meant that the new owners inherited a remarkable property portfolio. The largest city centre stores were freehold and had been well maintained, but were barely profitable even without paying rent. Meanwhile many of the smaller stores were more old-fashioned, yet generated the lion's share of profits.  Under the old management the firm's response to a loss-making store had often been to invest more money hoping to turn it around.

Similarly, alongside their retailing duties, the former FWW Directors had chosen to enter the field of property speculation, buying up City Centre properties adjacent to their largest stores and devising major redevelopment schemes to echo the success that they had enjoyed in the 1960s in Birmingham's Bull Ring. As a result they owned all but one of the properties in the block adjacent to the store in Wilton Road, Victoria, SW1 for example. It had been a salutory lesson in planning laws, with obstacles preventing the scheme from coming to fruition.

Rather than give up and sell these property portfolios, the previous Board had decided to persevere, opting to raise capital by selling a handful of stores. They had put the word out that offers might be considered. Their process was unstructured and it was clear that the Executives did not understand the full value of the portfolio or how it could be leveraged to give the chain new momentum.

The new management brought an altogether more hard-nosed approach. Initially they halted the disposals while the portfolio was valued. Amazingly the book value of the properties had not been updated through ten years of hyper-inflation, revealing an asset-base far larger than the purchase price of the company. It is clear from documents that have surfaced about the takeover period that the team from Paternoster had been well aware of the hidden value and had planned to use this to pay down their borrowings.

A revised list of disposals was quickly put into place. Without the sentiment of earlier times it included the closure of a number of iconic stores, several of which had recently been updated and modernised.

• On the corner of Bank Hey Street and Promenade at Blackpool, the art deco building that had inspired Stanley Holloway's 'The Lion and Albert' was sacrificed less than two years after a head-to-toe refurbishment
  
  
• The hallowed 'Store Number One' in Liverpool - sacred ground for many Woolies people - faced the same ignominious fate, along with Briggate in Leeds, Whitefriargate Hull, Middlesborough, Woolwich and Bristol - six of the first ten to open in Britain, and the chain's best-loved properties
   
• In the High Street at Sutton, Surrey the huge superstore went straight from re-opening sale to a closing down clearance - just one of many large stores across London and its suburbs to face the axe.

At the time long-serving Woolworth Managers were bitter at what they saw as the systematic asset-stripping of their busines. The problem was accentuated by repeated assurances from the new owners that each wave of disposals would be the last. But, taking an external perspective, most academics credit Paternoster as a case study. The new owners delivered billions of pounds of new value for investors from a fading asset, and created Kingfisher Group out of the embers of Woolworth.

The hard reality is that many of the City Centre stores no longer made a profit, even without paying rent. Many of the freehold properties that they occupied were worth millions, making an appalling return on the capital employed. Paternoster swapped loss-making City Centre Woolworth stores and freeholds for a highly profitable chain of B&Qs. In doing so they completed the strategy envisaged by the previous Chairman, Geoffrey Rodgers, with more focus than he could have achieved in the old structure. Woolworth assets also funded the acquisition of the big-name electrical retailer Comet, and the Superdrug Health and Beauty Empire, which was later doubled in size. The moves built the parent company, which was re-branded 'Kingfisher', to a point where it had the momentum and the cash reserves to expand organically into Europe and around the world. This was achieved by giving the Woolworth property base a radical shake up.

Of all of the closures and disposals, the decision to leave the Irish Republic was the most controversial. The chain had enjoyed considerable success in the Emerald Isle and was a going concern with a strong following in the Country and a dedicated workforce. The move, which was excused on the grounds of simplification, came as a bolt from the blue and led to acrimonious strikes and vilification in the Irish press. The management held their ground, offering generous severance terms and, where possible, making arrangements for managers to transfer to stores on the mainland or in Ulster.

By 1989 the wider Group had more stores, with 1,300 Woolworths and Superdrugs in the High Street (a rise of 200 over the decade) and a dominant position out-of-town at B&Q and Comet. The remaining Woolworths stores had a new trading formula which generated enough profit to pay full market rentals for the buildings and still to return a surplus far in excess of that achieved by the previous management in the late 1970s.

The amateur property speculation of the old Board had made way for a dedicated and well-respected property company, as Woolworth Properties Ltd was rebranded 'Chartwell Land' and worked to develop a number of former superstores into large shopping centres. During the 1990s as these schemes came to fruition, they provided purpose-built new premises to allow Woolworths branches to re-open in some of the towns abandonned shortly after the takeover.