05 Jun 2008
It has been four years since Richard Pennycook was interviewed by Accountancy Age’s sister publication, Financial Director. The last time, he mused over how much he enjoyed ‘the calmer, real world’ of a non-turnaround job as group finance director of breakdown recovery firm RAC, after almost a decade of continuously heading up turnaround teams.
Less than 12 months later, he was orchestrating the £1.25bn takeover of RAC by Aviva. Six months later, he joined Bradford-based grocer William Morrison Supermarkets, walking away from RAC having secured an offer price from Aviva that represented a 62% increase in the value of its shares in the two years he ran its finances.
He was supposed to take time out after that to go on holiday with his wife and two children. But this is evidently a man with a storm-chasing gene: besides, in his view, two years in a firm that wasn’t on the brink was a holiday.
‘When I joined RAC, I’d been in three big turnarounds, which was fairly exhausting. So it was good to operate in a normal business. Aviva came along and bought RAC. Then I got the call about Morrisons. And it was irresistible.’
By that Christmas, his family had moved from London to York, a 45-minute commute from Bradford, and Pennycook was taking on what turned out to be one of the UK’s toughest turnaround gigs: saving a £4.3bn (turnover 2003) grocer from being strangled by the perilously misjudged takeover of an £8.6bn (turnover for the same period) rival supermarket chain Safeway, in every sense bigger and more sophisticated than Morrisons.
It was clear that founder Sir Ken Morrison underestimated the integration task and that his board was not ready. By the time Pennycook joined in autumn 2005, Morrisons had issued five profit warnings in 11 months, having seen pre-tax profits slump to £61.5m from £332.2m the previous year. The company had breached its banking covenants and flung £513.6m at an integration that Pennycook says was simply ‘failed’.
Under closer City scrutiny, the company didn’t come up to scratch on corporate governance issues either, and only appointed its first ever non-executives, Next chairman David Jones and Persimmon chairman Duncan Davidson, the year before Pennycook joined. Added to that was Morrisons’ new customer base in southern England, who, until recently, turned up their noses at the Yorkshire-honed, family-founded brand of super-cheap foods and its ‘market street’ concept.
Luckily for Morrisons, Pennycook’s reputation was founded on rescue missions at a handful of well-known British retail outfits. Prior to joining RAC, he spent a year at Hereford cider group HP Bulmer on its turnaround team. Before that he led restructurings at Welcome Break and Laura Ashley.
His first group FD’s position, at pub retailer JD Wetherspoon, was a crucial introduction to the FTSE-250 world and its challenges; his achievements were an early indicator of his skill in raising the value of companies. On leaving the company, its shares had swelled in value from £4.62 to £16.50 a 257% difference. ‘If I hadn’t had those three turnaround experiences before arriving at Morrisons, I wouldn’t have known where to start,’ he says.
Curiously, Pennycook’s experience with family-led companies dominated his CV before arriving at Morrisons, and he thinks these have been largely positive places to work. ‘You get someone at the top with a clear vision and an understanding to the nth degree of what they want to achieve. So what you had in 2004 at Morrisons was a business that had been growing successfully for 40 years, with the best return on sales, and the best return on capital in European growth rate. [But it wasn’t] geared up to make a massive acquisition.’
Four years on, Morrisons’ last annual results were its first set of strongly positive numbers since before the Safeway acquisition and Sir Ken’s last results before retiring revealing 2007 turnover up 6% to £13bn, pre-tax profits almost doubled to £612m and net debt slashed to £543m from £772m year-on-year.
This is all very exciting stuff, but Morrisons is now in phase two of a three-phase recovery; namely, the optimisation phase, finishing systems integration, completing distribution planning and, as Pennycook says, ‘getting motoring again’. Will the easing of pressure equate to boredom for the perennial storm-chaser?
Not quite. ‘You do reach that point [where you can say that the business is turned around]. Trying to stabilise something that is out of control is the bit that is always very high energy, but the timing starts to stretch out as different parts of the programme go at different paces, and we’re now focused on distribution, systems and supply chain stuff that won’t get done until 2010-11,’ he says.
‘RAC was a chunky FD’s job, but compared with the pace and intensity of a turnaround it’s different. I love turnarounds, I love retail. But I don’t think we are ever satisfied and UK grocery retailing is brutally competitive. We’ve got to keep delivering.’
Pennycook predicts the company will spend about £1bn on furthering its optimisation plan in the next 12 months.
But what has helped him carve out a niche as a four-times corporate turnaround champion hasn’t been a talent for deference or falling in with consensus. An unblinking attitude to tackling big, complicated problems and leading change emanates from him. You could call it the confidence of experience.
‘To be good in turnarounds, which are by definition tough situations, you need a certain degree of experience. Most turnaround people will say that their first turnaround happened by accident they were in a business that got itself into difficulty and they stepped up to fix it. One of the fundamental lessons when you arrive in a turnaround situation is that you won’t have enough good people, so you have to bring some in. I got some very good people in here very quickly. If I hadn’t, I’d have failed.’
He brings up his first turnaround job, Laura Ashley a potent mix of long-term financial straits and failure to respond to a changing market exacerbated by squabbling between the Ashley family and its financiers.
‘I took a huge emotional burden on there. I was young and learned a lot, but it was very painful and it shouldn’t be that way. When I arrived, we reported a loss of £313m, were in breach of our banking covenants and faced a constituency that wanted to say, “Let’s understand what went wrong. Let’s go back to the original business case with this merger and find out why it has gone off the rails.” But when you’re in survival mode, you have to say, “Sorry, that’s for another day.” What we’re about here is moving forward, and that’s where you have to take the emotion out of it. It’s much more difficult for incumbent management, who perhaps have been part of the problem, to have that dispassionate relationship.’
There’s a great quote in a previous press interview in which Pennycook says that, when the kids start calling the builder Daddy, it’s time to take a break. He never did take that holiday.
This is an abridged version of an article that first appeared in the June issue of Financial Director magazine
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