'Concerns over debt' motivated Quarto boardroom coup

'Concerns over debt' motivated Quarto boardroom coup

Quarto’s dramatic boardroom takeover last week was partly motivated by a major shareholder’s concern over the publisher’s debt, The Bookseller has been told.

At the company’s a.g.m last Thursday (17th May), Quarto’s founder and former chief executive Laurence Orbach was installed as executive chairman and fellow shareholder Chuk Kin Lau of the Lion Rock Group printing company was appointed as an executive director, while four directors were axed from the board - chairman Peter Read and non-directors Leslie-Ann Reed, Jess Burley and Claire Capeci.

At the same time, Lau's colleague Mei Lan Lam, Lion Rock Group Limited's c.f.o., and Quarto's former chief financial officer (1987-2015) Mick Mousley were appointed as non-executive directors. Current chief executive Marcus Leaver was also re-appointed to the board along with current c.f.o. Carolyn Bresh and non-executive director Andrew Cumming.

Together he and Lau own a 47% shareholding in the illustrated publisher, which has a £47m net debt and a market value of £23.5m.

Graham Bird, managing director for strategic equity at Gresham House Asset Management Limited, a top 10 shareholder in Quarto, said Lau told the a.g.m the reason for stepping in was because he is concerned about the company’s debt and “does not feel the board were acting decisively enough to deal with it”.

“We have been in close contact with the company and other shareholders, and it was apparent that both Laurence Orbach and Chuk Lau were unhappy about the situation at Quarto and were becoming more engaged,” Bird told The Bookseller. “It was not a surprise that Orbach was keen to re-join the board and likewise it was not unexpected that Lau would seek board representation as he holds 27% of the company nor that the existing board would be under pressure.  However, the manner in which the board room coup was brought about was more dramatic than expected.”

Both he and fellow minority shareholder Paul Mumford of Cavendish Asset Management have called on the company to be explicit about their next plans.

“There is no indication of what they plan to do next," Mumford said. "They have got to come out with a statement saying what their plans are. Even if they come out with a holding statement saying ‘we are going to build up the company and inform shareholders of our future plans in due course’. I think they do need to say something so people believe in them.”

Bird added: “The new management will need and wish to explain and clarify their strategy to all stakeholders – employees, suppliers, customers, banks and shareholders.”  

He believes their strategy will involve dealing with the current banking relationships and capital structure, focusing the business on improving performance and restoring cash generation and the dividend.

“Note that whilst 2017 was a difficult year for Quarto, the second half of the year was an improvement on the second half of 2016 and the board confirmed that the company continues to perform in line with expectations,” Bird said. “We understand there have been improvements made to the financial discipline within the company in the last six months, demonstrated by the more recent performance, and the company has an attractive niche in its industry. We believe that Orbach and Lau wish to focus on the existing business and improve the operating margins to levels previously experienced.”

The boardroom coup surprised many, coming six years after Orbach was ousted from the position of chairman and c.e.o. in a board coup. Since that time, chief executive Marcus Leaver has reduced the group's debt, and sold off a number of underperforming businesses acquired by Orbach; the two major shareholders also voted down a plan that would have enabled the group to raise additional funds from the City on a non-pre-emptive basis.

"The a.g.m came out of the blue, we certainly did not know anything about it before, we didn’t know what was on the cards,” Mumford said.

Fiona Orford-Williams, senior analyst at ‎Edison Investment Research, also said it had been a shock. “Obviously Thursday’s events were a surprise to most of the outside world. But presumably Lion had been organising this for a while behind the scenes," she said. "I am very surprised to see Laurence and Mick back on the scene. Mick retired very gracefully about three years ago...and he was very much looking forward to being fully retired and he had lots of plans…but it must be an expression of the concern that the business hasn’t gone to plan.”

Mumford said there were upsides and downsides to the move from a minority shareholder’s perspective. “In one way minority shareholders will be reassured the company is going in one direction and the shareholders are now aligned," Mumford said. "On the other hand, they did take control on the cheap, because they had to vote off the previous directors and together they have a 47% stake, which is enough for a controlling interest. Bearing in mind they both voted the same way at the same time suggests it was a controlled move and they were acting in unison. If the company was registered at the London Stock Exchange instead of in Delaware, I think under LSE rules they would have had to make a bid to buy the company.”

Quarto has streamlined its operation over the last 18 months to become a more “pure play” publisher, making several disposals last year. It also faced a profit warning and an offer to buy the company from “mystery bidders”, thought to be Chinese.

However Michael Pay, who specialises in lead advisory at EMC Corporate Finance, a former financial director of Ivy, since sold to Quarto, and who recently handled the sale of Summersdale to Octopus, said he thought the boardroom coup was a positive move for the business.

"I can't see any good reason why, as the two major shareholders, Orbach and Lau would continue to sit on the sidelines. Orbach and Mousley built Quarto up into the only listed book packager in the world and were successful at it,” Pay said.  “Assuming that Leaver remains, I think that having them and Lau supporting him can only be a good thing. They have not taken over the company as they already owned a significant stake. There is no doubting that the business has its issues, with a large debt burden that must hamper its opportunities, but they continue to produce strong and appreciated content, and maybe the "coup" will accelerate the pace of change."

Quarto has refused to comment on the situation.