3i was founded in 1945 as Industrial and Commercial Finance Corporation as the UK government sought ways to reconstruct the economy and aid small businesses devastated by the second world war. Seventy-five years later, the UK government is looking for ways to refinance a UK economy devastated by the pandemic.
3i, though, has renamed and moved on. It has almost no exposure to Britain’s small and medium-sized enterprises. Just 6 per cent of its investments are sterling-based. More than two-thirds report in euros.
Action, the Netherlands-based cut-price merchant, is the investment company’s largest private equity holding by a country mile. At the half-year results on Thursday it said its 50-odd per cent in Action was now worth about €4.3bn, up from €3.5bn in March, based on a valuation of about 18 times earnings pre-nasties. Decreases in footfall in the past six months have been more than offset by increased basket sizes of sub-€5 items. The pandemic had done little to dent 3i’s conviction that Action could quadruple its store estate in time, said Simon Borrows, former banker turned 3i chief executive and Action’s chair, who at times sounds more like the boss of a European discount retailer than a buyout group.
His confidence was underpinned by first-half numbers from B&M, a lowlier-rated rival. On Thursday the discounter posted a 25 per cent increase in revenues, a 95 per cent rise in adjusted ebitda and announced a 25p special dividend to investors.
3i is sticking to paying ordinary dividends of 17.5p a share, worth £169m in total. Private equity detractors will carp about the £588m in carried interest paid out to partners in the past six months after a fund crystallised its Action stake. They will applaud any move by the Treasury to raise cash by taxing carried interest more punitively.
Mr Borrows counters that a change to the UK tax regime would probably affect about five of its people.
More to the point, perhaps, during Mr Borrows’ eight years at the top, 3i’s shares have risen from a discount to a hefty premium to assets and the company has paid out considerably more in dividends than it has in carried interest. And in contrast to the stereotype buyout businesses that load up investee companies with debt to flog within five years, 3i bought Action in 2011 for about €130m. It is worth more than €11bn today and Mr Borrows has no plans to sell. That’s not a bad template for a 21st-century version of the Industrial and Commercial Finance Corporation.
GVC missing the middle
What does GVC stand for? Sustainability, social responsibility and the highest standards of corporate governance, apparently. That's why the bookmaker is changing its name to Entain, to break from a past when those qualities were less pronounced.
New boss Shay Segev is keen to draw a line between himself and Kenny Alexander, GVC founder, who spent 13 years building the business only to exit in June with one day's notice. A few days later came news that GVC was facing an HMRC investigation tied to its former business in Turkey, where non-state gambling is illegal, and which until 2017 was providing about a quarter of group revenue. A previous, not wholly successful, attempt at drawing lines involved giving the Turkish operations away for free to investors that turned out to include Ron Watts, the co-owner with Mr Alexander of a stud farm in Ayrshire.
Mr Segev’s maiden presentation on Thursday sought only to look forward. Entain will build on GVC’s heritage not as a bookmaker but as a “technology-enabled entertainment business”. His corporate makeover adds a charitable foundation, upscaled detection of at-risk punters and a commitment to add responsible gambling metrics to the management bonus scheme. HMRC’s interest in Turkey was dismissed as “a matter of the past” — albeit one whose specifics remain vague.
Much of the moral purpose collides with financial pragmatism, however.
Entain will limit itself to nationally regulated markets but only by 2023, even though the problem territories provide just 4 per cent of 2020 revenue, which speaks of a desire to avoid another Turkey-style fire sale. Esports and digital gaming have been marked as expansion prospects yet Mr Segev would not rule out bidding for any old-economy turf accountants sold off as part of William Hill’s planned purchase by Caesars Entertainment.
On trading, GVC says recent wagering should be strong enough to absorb a previously announced £37m cost of enforced shop closures. Yet there was no mention of repaying government furlough support that has backstopped the wages of its 14,000 UK retail employees.
Mr Segev says he wants to “double or triple” Entain within five years. He will need to do more than give GVC an ESG veneer. The company somehow needs to keep delivering casino-grade profitability while easing worries about what might yet emerge from his predecessor’s appetite for difficult acquisitions. The current plan, much like the group’s new name, has something significant missing in the middle.
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