The Gateway Corporation Ltd.
The Gateway Corporation Ltd.
130 Wilton Road
London SW1V 1LU
Incorporated: 1974 as Linfood Holdings Ltd.
Sales: £3.7 billion (US$6.69 billion)
It is an indication of the frantic activity in British retailing during the 1980s that the Gateway Corporation has had three names during that period: Linfood Holdings, Dee Corporation, and Gateway itself. Now Gateway has been acquired by Isosceles PLC, a company formed specifically for the purpose of making the acquisition. This nominal uncertainty reflects the extraordinary speed with which Alec Monk, managing director from 1981 until 1989, built a company which at its zenith was England’s third-largest retailer of groceries and employed some 85,000 people. But the company soon fell victim to the dangers of rapid expansion and suffered a hostile takeover by a group of investors. Even in the dizzy world of corporate mergers Monk’s rise and fall was exceptionally abrupt.
Alec Monk was born in Wales in 1942, the son of a baker. After earning a degree at Oxford, he worked for Esso and then spent a number of years at Rio Tinto-Zinc (RTZ), a mining company, where he became a member of the board of directors at age 31. Apparently frustrated at RTZ, in 1977 Monk moved to New York and took a position with AEA Investors, a prestigious investment firm. After four years with AEA as a specialist in buying and selling of mid-size corporations, Monk was offered a post as managing director at Linfood Holdings Ltd., a British food wholesaler doing about £1 billion a year in sales. Monk admitted that before the offer he had never heard of Linfood, but he took the job and immediately began to shake things up.
Linfood was the result of a 1974 merger between Associated Food Holdings Ltd. and Thomas Linnell & Company Ltd. When Monk arrived in 1981, he decisively reoriented corporate growth in the direction of retailing, eventually restricting wholesale activity to the cash-and-carry supply of independent grocers and caterers. Linfood had acquired a number of Carrefour retail superstores in 1978, and with these as a base Monk began to build his grocery empire. From the start, his reign was marked by continual corporate skirmishing, as Linfood bought one rival chain after another or was itself the object of takeover attempts. Just weeks after Monk had joined his new company, Linfood escaped the clutches of the aggressive James Gulliver when Gulliver’s £87 million hostile bid failed to gain approval from the Monopolies and Mergers Commission.
Having survived this early battle, Monk began his own campaign of acquisitions. In 1983 Monk merged Dee supermarkets, which had been acquired by Associated Food Holdings in 1970, with Gateway Foodmarkets, which had been acquired by Linfood in 1977. Monk used Dee as the new name for his corporation. In June, 1983 Dee snapped up the 98 Key Markets, topping Safeway’s bid with a £45 million offer, and in 1984 followed up with the purchase of 41 Lennon’s stores for £25 million. At the end of that year, Monk and Dee made a quantum leap with the acquisition, for £180 million, of BAT’s 380 International stores. For the financial period ending in April, 1985, Dee had amassed sales of £2.43 billion and profits of £64 million, making Monk one of the London financial world’s most celebrated stars.
The Dee collection of stores included many small, older markets located primarily on the “high street”—that is, near the center of urban concentrations—as well as a growing number of supermarkets and a sprinkling of superstores (stores larger than 25,000 square feet and including nonfood items). By unifying many regional corporations into one organization, Monk was able to eliminate management positions, benefit from economies of scale in advertising and food distribution, and cut better deals with his wholesale suppliers. With each new acquisition, Dee gained not only additional clout in the marketplace but also the particular expertise of each chain, as one group might have specialized in fresh produce, while another had made a name for its meat departments.
As Dee grew in size, its profits grew proportionately, and it appeared to those in the investment business that Monk might expand his retailing success indefinitely. When, in 1985, no further targets were available in the British food retailing sector, Monk decided to establish a U.S. base with the purchase of Herman’s, the largest retailer of sporting goods in America. With 130 stores and a reputation for skilled management, Herman’s seemed a good bet; but in retrospect the acquisition proved to be the beginning of the end for Monk and the Dee Corporation.
Like other tacticians before him, Monk had spread his forces too thin, and he compounded the error a few months later when he bought a very large and complex chain of 419 Fine Fare supermarkets. At the time—early 1986—both moves were generally praised, but a series of apparently unimportant events soon combined to thwart Monk’s plans. First of all, both the Herman’s deal and the £686 million Fine Fare purchase were financed by means of “vendor placings,” in which new shares in a company are sold without first being offered to existing shareholders on a pro-rated basis. This technique, common in America, was new to Britain, and it inevitably angered the institutional investors who held large blocks of Dee stock. Their displeasure became an important, although subtle, drag on the price of Dee shares at a time when Monk was most in need of investor faith in his ambitious plans. The institutional managers felt abused by Monk, and their resentment seemed to color their assessment of his company’s prospects.
Those prospects, however, no longer looked quite as outstanding from any angle. Monk’s efforts to make Herman’s into a nationwide sporting goods chain were a disaster from the beginning. As the chain expanded into new parts of the country it could not keep its shelves stocked efficiently, and when it did have merchandise, it was often poorly suited to varying local tastes. Whiles sales went up, profits did not, and Monk soon found that he had transformed a well run regional chain into a national mess.
Much more significant were the problems at Fine Fare, the chain which had boosted Dee into third place among British food retailers by sales (and largest in terms of square footage), but which proved to be much more difficult to integrate and streamline than Monk’s earlier purchases. As it turned out, Fine Fare’s stores were not in the excellent condition Monk had expected them to be, but suffered from deteriorated physical settings and widespread pilferage. In addition, Fine Fare’s wide range of store formats, from vast suburban “hypermarkets” to hole-in-the-wall city locations, only added to Dee’s already complex distribution and administrative problems. Converting all of these stores to Gateway’s logo, accounting system, and corporate standards proved to be more difficult than Monk had envisioned, or at least more costly than investors were willing to pay for.
For the year ending in April, 1987, Dee’s first after the big mergers, the company was expected to earn around £230 million on sales of £4.8 billion; when the figure came in at £192 million many already-disenchanted analysts said that Monk had gone too far too fast. As a result, Dee’s stock price faltered, drifting sideways while the market as a whole was booming along at a 45% faster clip. For the year and a half following the Herman’s purchase, Dee’s stock was dead last on the Financial Times’ list of the 100 leading companies in Great Britain. Monk defended the prudence of his moves, noting that he had predicted all along that it would take three years for Dee to assimilate its new acquisitions fully, which by 1987 also included the country’s fourth-largest drug chain, Medicare, and two more American sporting-goods outfits. He asked for patience and a little faith, two commodities always hard to buy on the world’s stock exchanges. Monk might have come through the crisis if Dee’s first half result for 1987-1988 had been outstanding. They proved to be the worst blow yet: the £64 million total announced in the fall of 1987 was 18% below the previous year’s midterm figure, and rumors of a takeover immediately began to circulate through the City. When the October 19, 1987 crash ruined the Christmas selling season for Herman’s, it was only an appropriate conclusion to Dee’s dismal year.
Even the stock crash could not prevent the beginning of a prolonged and bitter bidding war for what was now characterized as an overly diversified, poorly managed conglomerate. In December of 1987, a British confectionery company called Barker & Dobson (B&D) offered Dee shareholders the equivalent of about £2 billion for their stock, charging Monk with incompetence and promising to sell off unprofitable parts of the Dee network. Monk fought back vigorously, however, spending millions of pounds in defense of his company and its future prospects. Second half profits for the fiscal year ending April, 1988 were substantially better, cutting the total annual decline to only 3%, and the chairman could point to the company’s remarkable growth and the profits to be realized when all of its stores had organized themselves under the Gateway banner. When the votes were counted in the spring of 1988, Monk had won the battle easily and Dee appeared safe for the time being.
The grace period was short. Although Monk took steps to correct some of the problems Barker & Dobson had harped on, selling, for example, Dee’s Spanish distributing business and the original Linfood wholesaling subsidiary, it was only a year later that the second wave of predators made its attack. Dee had changed its name in the summer of 1988 to Gateway Corporation, emphasizing its commitment to the retailing end of its business, but to David Smith it was still the same bloated, underpriced temptation. Smith had been a financial advisor to B&D during its unsuccessful bid, and, backed by a variety of large investors, including the British investment bank S.G. Warburg, he launched his own strike, under the name Isosceles PLC, in April, 1989. After intense competition from a number of other bidders, including a company called Newgateway PLC, put together by the Great Atlantic & Pacific Tea Company and dealmaker Wasserstein Perella & Company, two U.S. companies—Isosceles emerged the winner in July of that year, buying up a bare majority of the stock to force out Monk and his board of directors.
Smith wasted no time implementing the policy B&D had urged two years before, selling off 61 of Gateway’s largest superstores to the Asda Group and repositioning the company as an operator of mostly mid-size, high street retail outlets. Gateway will no longer try to compete with the big out-of-town and edge-of-town grocers, but will fill the somewhat smaller niche left in-town by the emergence of the suburban superstore. It will almost certainly sell Herman’s and its other nonfood holdings, concentrating wholly on developing its rather delicate market position in groceries.
The Gateway takeover, however, was not altogether successful. In December, 1989 Isosceles launched an offering to help unload some of its US$2.1 billion in debt, but was unable to find buyers, and its 16 underwriters were left holding US$848 million more in paper than they had expected. Isosceles itself must now settle down to cope with the difficulties of consolidating Gateway’s operations.
Carrefour Ltd.; F.A. Wellworth and Company Ltd. (Northern Ireland); Gateway Food-markets Ltd.; International Stores Ltd.; International Stores Properties Ltd.; Lennons Group Ltd.; Herman’s Sporting Goods, Inc. (U.S.A.); Gateway Properties Ltd.; Fine Fare Ltd.; Wellworth Properties Ltd. (Northern Ireland); Fine Fare Properties Ltd.; Elder Gate Property Co. (C.B.) Ltd.