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Zombie business threat to food and drink firms

By John Wood , 26-Nov-2012
Last updated the 26-Nov-2012 at 18:06 GMT

Food and drink manufacturers face the zombie business threat
Food and drink manufacturers face the zombie business threat

A plague of ‘zombie companies’ is threatening to suck the vitality out of the UK economy, according to leading insolvency experts, and the food manufacturing sector could be under threat.

‘Zombie company’ is a label that has several definitions but, at its most extreme, refers to businesses that can generate enough cash only to pay off the interest on money owed, but are unable to pay off the debt itself.

According to R3 – a trade body that claims to be made up of 97% of the UK’s insolvency professionals – there are now 160,000 zombie companies in the UK that are able only to keep up with their interest payments. That compares with 146,000 in June.

While it is good for companies in this situation, and their employees, that banks are willing to prop them up, their existence can be a drain on other more successful businesses seeking funds to expand.

‘Stagnation ties up capital’

R3 president Lee Manning explained: “We know that banks are displaying greater forbearance on existing debt, but when a business cannot get extra lending it will be unable to expand. Some would argue that this stagnation ties up capital that could be used for other, healthier businesses.”

Manning said it was difficult to quantify how many food manufacturing companies qualified for the label zombie business.

Analysts covering the food manufacturing sector told FoodManufacture.co.uk that most of the companies in this position were smaller businesses that were not publically quoted. That meant their accounts were not open to detailed scrutiny, and they were unlikely to publicise their plight.

But Clive Black, analyst with Shore Capital, said: “I’m sure there are lots of companies out there in the food sector that could be called zombies because it’s one of the biggest sectors for SMEs [small- and medium-sized enterprises] in the UK.”

Growing problem

But another business analyst told BBC Radio 4’s File on 4 programme that some zombie companies deserved to be saved.

Mark Thomas, a business strategy consultant with PA Consulting Group, who was one of the first people to describe the zombie phenomenon, said: “It makes good sense to distinguish between two extremes.

“You can have a company, which is actually a troubled company, it has a product or a service which just doesn’t fit the market anymore, it has no future. Even if it had zero debt, it’s still a dying company.

“But at the other end of the spectrum, it doesn’t matter how good a company is. If you load it up with too much debt, it becomes unable to service that debt.”

Before the crash, when the private equity boom was at its peak, there were examples of companies being geared up so much that just a few per cent fall in profits would be enough to make them unable to service their debt, said Thomas. “Some of those are very good companies that really should be saved.”