UK - Pension trustees at WH Smith are effectively blocking the £940m (€1.4bn) approach by Permira to take the company private.
Martin Taylor, chairman of the trustees and ex-chief executive of Barclays Bank, said he told Permira that any acquisition of Smiths would have to guarantee that the pension fund would have at least equal priority with the banks in case it collapsed. The WHS Pension Trust, which was closed to new members in 1995, was in deficit by between £200m and £250m, he added.
This would affect the deal as Permira, which approached Smiths in April, would need to put in place around £600m of borrowings to fund its purchase.
Currently, Smiths has almost no debt on its balance sheet and last July put in place a 12-year deal with the trustees to pay off the deficit. The trustees have the ability to decide ont he funding rate, which in the last 12 months was £42m, of which £29m went on paying down the deficit.
Although the trustees cannot prevent the sale it could force the defined benefit scheme, which closed to new members in 1995, to be wound up and funding hole be filled.
Taylor said: "There is no need for Permira to negotiate with us, just wisdom. Trustees have the power to set contributions and it is pretty obvious that in a highly leveraged structure the trustees would not want to be unsecured creditors and adding £600m in debt to a company which previously had a market cap of £575m is a material and adverse change.
"We sought a meeting with Permira as we are not concerned by any change in ownership but in changes in the balance sheet structure. The trustees are unanimously of the view that any leveraged buy-out we would need the money for the_deficit upfront, or to be ranked equally with the major banks or have guarantees from Permira's other investments. We would be negligent if we did nothing."
Permira declined to comment but Smiths’ spokeswoman said it was not party to the discussions but it hoped to be told a timetable for further discussions shortly.
Since 1997, 10,000 DB plans with 300,000 members have been terminated and since the downturn in the equity markets from 2000 more than half of all private sector DB schemes have been closed to new entrants. But these schemes are left in run-off and the majority are in deficit. The Pensions Act, which has just had its second reading in the House of Lords, will give trustees further rights to make sure sponsoring companies meet their obligations and could, therefore, further affect shareholders and other creditors.
Jim MacLachlan, head of Standard & Poor’s European pension services business, which is next week launching a service to help trustees negotiate fund levels with their scheme sponsors, said: “WH Smith highlights the debt-like nature of pensions deficits and the legitimacy of trustee concerns over scheme solvency and the solvency of sponsors.”