The protracted negotiations to take over Halliwells after financial difficulties saw the firm signal its intent to appoint an administrator (The
Lawyer.com, 25 June 2010) appeared to have come to an end on Friday (2 July) as three firms appeared to have snapped up its assets.
As reported on the front page, Barlow Lyde and Gilbert (BLG), HBJ Gately Wareing and Hill Dickinson have each agreed to acquire parts of the business. The deal appears to have been done just in time.
As one restructuring partner says: “The textbook way of doing these things is over a weekend, which is what Hextalls did. The absence of a rescue here suggested that something tough was going on. That’s a scary place to be because the value just walks out the door.”
It should come as no surprise that it took some time for a deal to be done given Halliwells’ high level of indebtedness. In the 2008-09 financial year the firm and its members had joint liabilities of as much as £40m – made up of an £18m bank loan, £6.2m non-property leases, £10m members’ capital liability and an estimated £6m tax bill, in addition to an annual rent bill of £8.8m – on a turnover of £78m.
While discussions were most advanced with Liverpool-headquartered Hill Dickinson, which was in talks to take over the entire business but has settled for its Liverpool operations, three other firms vied to acquire Halliwells’ insurance business.
BLG had been looking at the firm for some time and is understood to be taking over the insurance business. Other names in the frame were Bolton-based Keoghs and Birmingham-based HBJ Gateley Wareing, the latter of which is planning to take over Halliwells’ Manchester arm, including the controversial Spinningfields office. Keoghs is not believed to be taking on any of Halliwells’ assets.
The fight for the insurance business is not surprising. Halliwells has not issued a breakdown of its practice income for some time, but while corporate and real estate have inevitably suffered from the market downturn, its defendant insurance business has remained robust, notwithstanding the exit of a number of partners from James Chapman & Co, who joined Halliwells in 2006, and clients including Zurich.
Current clients are believed to include AXA, Chartis (the rebranded business of AIG UK), NFU Mutual and Quinn, the Irish insurer of around 3,000 UK firms that recently went into administration.
Nevertheless, an acquisition is also fraught with potential problems, something that will not be lost on BLG, HBJ or Hill Dickinson. Workflows can be volatile and losing one panel place can be enough for firms to see the fee-earners and office space on their books as a liability rather than an asset.
Another issue is the nature of the work and how quickly the acquiring business is likely to be able to recoup its investment. Personal injury work, for example, tends to be paid when a case is settled, which can take several years.
The fact that Halliwells filed notice of its intention to appoint an administrator meant it technically had about 10 days to do a deal. In reality, this period can be extended, although the Law Society would not look kindly on any extension. It has always been in the interests of the business to maintain client goodwill in order to stop them pulling contracts. This is also why Halliwells was keen to bill any potential move as a merger rather than a pre-pack administration.
“The underlying business remains strong and has attracted interest from a number of parties,” says a press statement, while one corporate partner was at pains to give it a particularly positive spin, saying that “if there is some sort of merger that would be a positive thing”.
But it is the leading insurance partners that have been key to negotiations. These include the well-respected catastrophic personal injury specialist and head of insurance liability Kevin Finnigan, who sits on the firm’s board, and partners James Dadge and Peter Walmsley.
A source close to the firm said that Finnigan would have looked to get the best-possible deal for himself and his team. This could have put him at odds with fellow board members such as managing partner Jonathan Brown, who is thought to have favoured the Hill Dickinson deal because he is keen to return to his native Liverpool after a challenging few months at the helm. Brown took on the managing partner role in September 2009 after a reshuffle saw then incumbent Ian Austin move into the more ceremonial executive chairman role.
A further issue that was seen as a stumbling block to the administration process was the future of the firm’s headquarters at Spinningfields in central Manchester. Halliwells took on around 120,000sq ft in the building at the top of the market and the firm is believed to be paying around £35 per sq ft for the space.
The financial blow was sweetened with an incentive that saw Halliwells’ then 40 equity partners receive a cut of the proceeds of a future sale, effectively amounting to a cash windfall. A company called Halliwells Deansgate, which dissolved last month, was set up to manage the funds. Only the equity partners that were part of the firm when the deal was done in 2005 received a share of the money. Around 14 of those remain in the business.
However, with turnover at Halliwells falling – it dropped by 10 per cent from £87m in 2007-08 to £78m in 2008-09 and a further 14 per cent to £67m in the last financial year – the firm was unable to keep up with its rental obligations.
It was probably not a coincidence that the day in which Halliwells filed its notice of intention to appoint an administrator, thereby protecting it from forfeiture of the property by its landlord, was the same day its quarterly rent bill was due – 25 June.
Growing Manchester has been at the top of Hill Dickinson’s agenda for several years. The Spinningfields office would give HBJ a Manchester presence in a landmark building, but the firm is understood to be seeking to renegotiate the expensive rental costs. One Manchester agent estimated that the going rate for the Spinningfields complex is in the region of £28 per sq ft. The agent said current market rates include a 2.5 three-year, rent-free incentive on a 10-year lease, a period that could be increased to as much as four years rent-free on a 15-year lease.
But this is just the beginning of the property headache. Halliwells entered the Liverpool market in 2005 through the acquisition of local firm Cuff Roberts and subsequent raids on the likes of DLA Piper. At that point it took on 21,000sq ft at The Plaza on the city’s Old Hall Street. It then went quiet until December last year, when the firm made the surprise move of taking on an additional floor in that building on a lease that runs until 2031.
A further issue that remains unclear is successor liability. Any partnership that takes over the majority of Halliwells’ partners will also be liable for professional indemnity claims for a period of six years as a successor practice. HBJ, which is likely to take on the biggest part of Halliwells, will have some protection in that it is officially exempt as an LLP, but, according to the Solicitors Indemnity Rules, it must ensure it does not imply it is the successor practice in any “notepaper, business cards, form of electronic communications, publications, promotional material or otherwise, or any statement or declaration to any regulatory or taxation authority”.
That said, as one broker points out: “The acquiring business may decide that it’s worth their being identified as the successor because of the potential goodwill associated with that.”
While the deals are subject to approval from partners at BLG, HBJ and Hill Dickinson, time is arguably running out for Halliwells’ 813 employees. It is thought the firm’s payroll day is 10 July and a new owner or owners will need to cover wages, which in 2009 totalled £29.6m – an annual cost that will
have fallen given the reduction in overall headcount since then.
The question that remains to be answered is what will happen to Halliwells’ much diminished Sheffield and London offices.