The bubble bursts for the Babycham buyout dream

THERE were always doubts about the Gaymer management buyout. Months after backing the pounds 140m Allied-Lyons spin-off, Stephen Curran of the venture capitalist Candover Investments admitted he was worried about falling profits and lack of investment in famous names such as Olde English, Merrydown and Babycham.

But Mr Curran was sufficiently impressed by the six-person management team to press ahead with the deal. 'They appeared competent, hard-working, skilled and sensitive,' he said at the time.

That confidence has proved misplaced. Two and a half years later, the Gaymer Group is in disarray. Sales have stagnated, the machinery is out of date, costs are spiralling and staff at the Bristol headquarters are floundering in a tide of bureaucracy.

Yesterday, in a radical change of direction, Mr Curran and fellow backers of the buyout sold out to Matthew Clark, the drinks distributor, for pounds 109m (partly funded by a pounds 64.6m rights issue) at what appears to be a loss of pounds 30m.

In their defence, the pounds 30m cold bath is not as bad as it first appears. Gaymer inherited pounds 25m in cash, it never needed to pay back a pounds 10m performance-related loan and it paid investors pounds 13m in dividends. 'We have left with a modest profit,' one investor said.

Even so, the event remains an inglorious moment for Candover, CINVen and Legal & General, the venture capitalists which normally would hope for returns of up to 30 per cent per annum.

How did this setback occur? The cider market, providing 51 per cent of Gaymer sales, has enjoyed more than 5 per cent growth annually for three years. But competition is intense. In the off-licence trade Gaymer was hit by cheap cider from abroad, while other prestige brands, expertly marketed by Taunton and Bulmer, took their toll in the pubs.

Gaymer's management team led by John Wilkinson has been attacked for its failure to respond. Management simply froze, according to sources close to the company.

Failure to invest in plant left bottling speed awkwardly slow, and fermenting times twice industry averages. Consumer-led marketing, including pounds 3.5m spent on relaunching Babycham, did not prevent Gaymer products being squeezed out of pubs by increasingly fierce competition.

Revenues and profit stagnated: turnover increased by just pounds 5.5m (3.7 per cent) from 1993 to 1994, profits by pounds 400,000 (2.5 per cent).

'It was like the parable of the talents and the Gaymer managers were the ones who buried their wealth down a hole in the ground,' an industry expert said.

It is now left to the managers at Matthew Clark to pick up the pieces. Once a family-led drinks distribution business, Clark ran into trouble in the late 1980s with the loss of distribution rights to brands such as Martell brandy and Macallan scotch whisky.

In 1990 the company appointed a new chief executive, Peter Aikens, who launched a restructuring programme. He hit the acquisitions trail, buying Strathmore, the Scottish water bottler, for pounds 11m in 1992, Freetraders, an independent drinks distributor, for pounds 18.6m in 1993, and Grants of St James's, the wine distributor, from Allied-Lyons for pounds 32.5m later last year. Since his arrival, the market capitalisation of Clark has risen seven times to pounds 150m.

Mr Aikens is impatient to get to grips with Gaymer. In 1992 he bid pounds 70m for the group, only to be beaten by the management buyout for what he describes as an amazing price. Since then he has stalked the business like a hunter.

Gaymer's prestigious brands make a natural fit with Matthew Clark's expanding distribution empire. Mr Aikens sees large savings in reducing working capital and trimming the number of customers the group serves. (Fifteen of Gaymer's 700 customers account for 80 per cent of business.)

Of the original management at Gaymer, two have left and Mr Aikens will meet the other four next week. Meanwhile, he is sending in a team led by Kevin Philp, head of marketing and sales, and Richard Peter, head of production.

(Photograph omitted)