Mismatch Financing

Philip Augar in his book 'Reckless The Rise and Fall of the City' page 112 stated that :-

' One example concerned the management buyout at Debenhams backed by the private equity groups CVC Capital Partners, TPG Capital  and Merrill Lynch Private Equity in 2003. The backers had put up $606 million in equity and $1.1 million of debt was raised on Debenhams balance sheet. By remortgaging some of the stores and raising $325 million from the bond markets, the company was able to pay its new owners $130 million by way of a special dividend within months of the takeover. This perfectly routine piece of financial engineering would have attracted no attention except that soon after the business was listed on the Stock Market in May 2006 profits and the share price collapsed.

The above strategy looks attractive in cashing out the cash and sharing it with the involved party. The immediate investors will get their sweetener before the real operating profit/lost are generated/incurred which normally will take at least quarter of decade for the detection. It is an easy money for the investor and may generate interest to the speculator to jump into the boat and reaping the crop of the easy dividends. It will increase the immediate price of the stock when the number of the speculators increasingly pile up into this counter.

However, not all of 'good days' will end up with a brighter weather, the speculators normally will left the company after a shorter parking period, not to stay for a longer one. After the peak is over, the stock price will reduce back to the real level or lower. Then, the operational matter is the one to determine the value of the company, real value with a real business.

The earlier attraction which is putting the sugar to the ants is not a good solution. It is a mismatch financing activity in which the dividend is created from the loan not from the profitability of the company. Loan is not meant for profit distribution but it is good for CAPEX(capital expenditure) and OPEX (operational expenditure).