Case Study

Caledonian Book Manufacturing Co Ltd

Background

Caledonian Book Manufacturing Company Ltd was formally the HarperCollins book manufacturing plant and was the subject of a buy-in in 1996. Since the buy-in there have been a number of work practice and technology changes to increase efficiency with the result that the company has the most modern computer to plate technology in the UK.

The print industry has an unfortunate history of strife between management and workforce and to make Caledonian into an efficient and productive company on a world basis a partnership between management and employees was required. In addition the company required to strengthen the balance sheet and reduce the fixed cost base.

The options

For the owners there were two clear options. Firstly, further equity could be injected through venture capital which, however, would require a subsequent trade sale or listing. The second option was to both expand the capital base and reduce fixed costs while creating a partnership with the workforce through an ESOP.

The process

As with all projects the EOS method is to take a hard look at the feasibility of employee ownership. Following this EOS proposed a corporate finance strategy which would bring fresh capital into the business through the EBT shareholding, and having the employees purchase shares through wage deductions thereby reducing fixed costs in real terms.

The banks then had to be persuaded that this was a good way of injecting fresh capital, the employees had to be informed of the benefits of ownership, and the trade unions also had to be persuaded to back the project. All this was accomplished at a series of meetings and presentations. In addition to an offer from the company's current bankers serious discussions have been entered into with other providers of capital including a European specialist funder of ESOPs.

Raising of the finance

The first stage of finance raising was to determine the amount required and, obviously, the agreed selling price would have a major impact on the capital requirement. The agreed price was settled on negotiation. The means of raising the finance was as follows:

• Employee Share Ownership Plan

An integral part of the ESOP mechanism is the Employee Benefit Trust. Under the agreement the EBT will own approximately 30% of the shares which through time will be passed to the workforce.

• Employee shares

As the company continues to generate profit the ESOP mechanism will use pre-tax profit to distribute the shares held in the trust to all employees. The shares still have to be held in trust for 2 years to avoid being treated as a benefit in kind.

After the conversion

The company continues to trade and use its profits to fund the purchase of the shares held by the EBT. The company now has a framework to extend employee ownership and/or act as the conduit for the exit of other equity participants. As time passes the workforce will be more fully informed and committed to the success of the business.