Loch Fyne Whiskies - Scotch Whisky Review

LFW is delighted to welcome Turnbull Hutton as a contributor, until recently head of all distilling for industry leader GuinessUDV. Informed, outspoken and independent, his comments are based on a lifetime in the industry.

The news of the £208m management buyout of the former Whyte & Mackay/ Invergordon business from Jim Beam Brands contained the now obligatory reference to the business having returned to “Scottish Ownership.” Great news one would think—shouldn’t as much, if not all, of Scotland’s most important industry be owned by we Scots?

However, this triggered a few thoughts as I carried on reading through the reported structure of Kyndal International—the name of the new business: German backers—WestLB: a layer of mezzanine finance; as well as the management team’s own “investment in their future.” All pretty straight forward—a classic MBO.

By the end of the report, probably half an hour later (no, I’m not a slow reader, I merely had a zizz half way through) speculation had already started as to when the new company would go to the market, after all that is the next step in the MBO process. No management team is going to deny themselves the rich pickings that have accrued to others in similar situations and with the best will in the world I cannot imagine German bankers having an overriding long-term interest in Scotch Whisky. Call me an old cynic if you must, but aren’t they also pretty interested in getting a return on their investment pretty damn quick?

Following this train of thought through logically, it is at the time of any flotation that the much vaunted “Scottish Ownership” quickly goes out the window. In come the fund managers—primarily London-based barrow-boys— who will be courted to invest their clients’ money in what will, by that time, be a new dynamic organisation in an exciting sector (where the leading industry player seems to be doing kind of OK presently).

It is at this point where, to mix my film metaphors, ‘Whisky Galore’ meets ‘Groundhog Day’. Have we not seen all of this before? Is this not vaguely familiar to whisky watchers the world over? After flotation will not this “Scottish Company” have to simply perform for their new bosses—their shareholders—who, surprise-surprise, will be unlikely to be (a) Scottish or (b) hellish interested in understanding the finer nuances of a sector that they have described many times as being “dull”. Why invest in it then? Well, One does need a balanced portfolio if One is looking after say, a pension fund; risks have to be spread, and the boring, dull booze business just about keeps going. However in return for the initial investment in the flotation the fund managers will expect dazzling short term returns—after all they have benchmarks to beat if they are to be given the privilege of gambling with other people’s money! This, they themselves feel, gives them the right to comment on a company’s performance using a variety of “Key Performance Indicators”. In no time at all these same individuals are putting pressure on Management to take possibly damaging and certainly short-term measures to maximise the returns. If this does not happen the share price will fall on the back of a view that it is a “dull” sector. Recommendations follow regarding mergers—or demergers—or MBOs…. you’re beginning to catch on to this now. It is ‘Groundhog Day’.

The words are always the same; “tremendous synergies”...“consolidation”... “asset utilisation”... Were these not the very words or arguments put forward when Whyte & Mackay took over Invergordon Distillers?—another “Scottish Company” as I recall (although it probably wasn’t after their flotation following their MBO from Vickers—or was it British Aerospace?!)

We’ve been here before folks!

DCL—Scottish-based but 6% Scottish owned when the Guinness takeover was engineered, to keep out a company at least led by two Scotsmen but not Scottish owned. This became UD; then more synergies… Grand Metropolitan merges with Guinness... UD becomes UDV... Guinness/GrandMet becomes Diageo… exit Dewar’s to Bacardi (certainly not Scottish)... Seagram carved up... hopefully, at some point... to Diageo and Pernod (hardly Scottish —unless we reconstitute The Auld Alliance!) I could go on but you’ve got my drift.....

We now have an industry where “Scottishness” could be construed as a rare commodity. Don’t get me wrong—we still make the stuff , nurture it, blend and bottle it, but the corporate power bases tend to be in London/Bristol/ Amsterdam/Tokyo/Paris... Was this because our “Scottishness” was up for sale? As it will no doubt be again?

So is it more power to the elbow of the smaller independents—Scottish owned, some family owned—or a salute to The Edrington Group who completely reversed the trend and took the publicly quoted Highland Distillers private, thus freeing themselves from any of the short term pressures referred to earlier. They concluded—and are now demonstrating—that understanding and investing in “Scottishness” is a long term strategy; promoting it to merely sell it on again seems a route we have trodden previously.

However, after having said all that—we are where we are. Truth is that the independent Scottish-based companies would be the first to concede that the multi-national big boys do one hell of a job using their collective muscle in creating the new market opportunities—whether ready to drink, new categories or simply raising the profiles of existing products. The Global Companies do invest heavily and, whilst they benefit themselves, there is no doubt a spin off for the whole sector—Scottish owned or not!

I should lie down now (another zizz perhaps) before I start wittering about nationalising the whole industry. Come to think of it, maybe this is not so daft. On the other hand it would no doubt lead to opportunities for synergies, better asset utilisation, consolidations—and allow the SWA the opportunity to make their usual helpful press statement along the lines of “1000s of jobs at risk……….!” (The counter to this is whenever a restricted whisky market ‘opens up’ the same organisation comes away with “1000s of jobs could be created………..!” Ever wondered if it’s the same people who just get a job and then lose it again? That’s another story altogether!)
For now the Industry must learn from what has gone before; Scottishness is too important to pay mere lip service to. The ‘new’ Whyte and Mackay team must succeed. Apart from their personal financial opportunities in the long term, they will undoubtedly have some interest payments to meet in the short term! Can the new team be more successful as owners than they were as employees? And if so, why didn’t they do it for their previous employers?

I once had a boss who was opposed to MBOs for that very reason; he believed that if individuals could do it better for themselves he should fire them for not doing it for the Company. On reflection he was probably a naïve old buffer like myself!

[And lo! Immediately after our receiving this piece, Inver House, a company formed as a result of a management buy-out, announced that they were selling themselves to an Asian buyer for £56m. We tried asking Turnbull for further comment but he had gone for his zizz.]