Balaclava: the house of cards

The collapse of managed pub operator Balaclava highlights the house-of-cards climate in which many pub companies compete.

A combination of factors came together, any of which the business might have traded through singly, but which put together led to Balaclava calling in receivers RSM Robson Rhodes last month.

Balaclava managing director Leo Murphy, who founded the business in 2001 stressed he was not seeking to make excuses or deny management responsibility by setting out the key factors behind the company's troubles.

However, the problems that beset Balaclava will strike a chord with many in a tough market, which has seen operators such as Mustard Entertainment, Po Na Na and Porter Black go under in the past year.

Balaclava had big ambitions, hoping to build an estate of around 200 pubs. Ironically, its specialty was turning round underperforming houses.

However the company found it had overstretched itself in the wake of the acquisition of the 27-strong Hobgoblinns pub operation last year.

The deal doubled Balaclava's estate to 54 overnight, with the enlarged company employing 650 people. Mr Murphy said that working capital in the business had always been tight, and the decision to proceed with the Hobgoblinns acquisition was a tough one.

He said: "Following extensive due diligence during which Hobgoblinns' trade declined, a price reduction of £600k was negotiated, but the lending bank reduced their financing offer by £1m."

The problem was compounded when, on the Monday after the sale went through, and before the Balaclava management had entered the Hobgoblinns office, £300,000 was paid to under direct debits set up by the previous owners. This reduced creditor days from 72 to 27 in a business already strapped for cash.

In order to do the deal, Balaclava took on an £11m debt and equity mix from Bank of Scotland. To help finance the acquisition, it planned to sell the three largest Hobgoblinns pubs to another Bank of Scotland customer straight away.

The bank was confident enough in the sale to advance Balaclava a £3.25m bridging loan. However, the deal fell through shortly after completion of the Hobgoblinns acquisition,. With the pub property market in decline in the second half of last year, previous bidders for the pubs also backed away, and the bridging loan could not be repaid.

Balaclava's woes were compounded when its management team was hit by illness in the weeks after the acquisition. Its commercial director was hospitalised, and with the operations director also falling, it left "management overstretched in the critical first weeks of trade," said Mr Murphy.

With business tougher for most operators over he past year, "the trading environment was insufficient to support the business in its over-leveraged state in the first year of trade," said Mr Murphy.

Almost all Balaclava's pubs are leasehold, 27 of which were owned by Punch Taverns. Punch said it had accepted the surrender of 15 leases from Balaclava at the start of September, and has also taken back two pubs that were operating short term tenancies.

The receiver is currently marketing the remaining ten tenancies.