Tuesday, August 21, 2018
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Gerald Ratner - The Rise and Fall and Rise AgainIn the early 1980s we took all the mystique out of buying jewellery and made our shops as welcoming as Marks & Spencer. Our posters screamed discounts and “3 for 2” offers just like the fashion shops, and we started playing music and replaced the chandeliers with modern light fittings.

Something had really changed in the jewellery market. Customers weren’t looking for heirlooms; they were thinking about what they would wear that night, and the primary consideration was price. Manufacturing methods were changing, too, so it was possible to stamp out earrings and pendants using far less gold.

We moved them to the front of the window and moved our diamond rings into the arcade windows. This might sound insignificant, but it was revolutionary: we were hiding our prestige items and flaunting our cheaper products. Our key shopping hours became Saturday afternoons, when in the past we had been closed.

In retailing, it’s amazing how quickly you can get results: you can make a decision on a Thursday, implement the changes by Saturday, and on Monday you can check the sales figures to see the results. We had been a loss-making company; now the City started to notice our sharp rise in sales and profits.

The shops were rolled out with a McDonald’s approach – every shop had the same stock, the same lettering on the fascia.

H Samuel, the upmarket jeweller and our main rival, had spent a fortune bringing in all kinds of “experts”, yet their sales declined. I first realised how much trouble they were in when I visited our shop in Ballymena in Northern Ireland in the run-up to Christmas. The H Samuel shop was round the corner and I was curious to see it because I knew they had hired a big design consul-tancy to do their Christmas displays. As soon as I saw their window, I knew they were going to have a bad Christmas. They had stuck plastic icicles over the windows so that you couldn’t see the jewellery!

When I was a lot younger, I had learnt a valuable lesson in sales when I had gone to Petticoat Lane market. It didn’t really matter who had the best gear, it was the stallholders who shouted the loudest that got the most sales. If you compared Ratners’ windows with H Samuel’s windows, it was as if they were just whispering to their customers to come in while we were screaming from the top of our lungs.

H Samuel had let the designers have full rein, and they had forgotten some of the basic rules. If you look at most successful jewellers, you’ll notice how the diamond rings are – almost always – precisely 42in from the ground. Bizarre as this may sound, there’s a very good reason for it: the average woman is 5ft 4in, and if a ring is 42in from the ground, it will be in her eyeline. H Samuel’s designers had put the diamond rings above head height. It was clear their fortunes were not about to change and their share price would continue to drop.

Ratners’ rapid turnround had created a lot of interest in the media, and I had been forced to hire an outside PR agency to handle interview requests. I was learning that the press could be very useful, and I discussed how I might let it be known I wanted to buy H Samuel without seeming arrogant or ridiculous.

My PR agent arranged an interview with one of the Daily Telegraph’s business correspondents, David Brewerton. I took him to Mark’s, a private club in Mayfair, where I let him know just how well we were doing – we had just doubled our annual profits – and talked about how much H Samuel was underperforming. He then wrote in the following day’s paper that Ratners should buy Samuel. And as it looked like his suggestion, it gave my plans even more credence.

The City had wanted changes at Samuel for some time. It had an archaic share structure that was seen as a barrier to investors turning a decent profit. Its shareholding was made up of A and B shares. The A shares represented about £13m and were owned by the Edgar family, relatives of the original founders. The B shares – which represented about £125m and 73% of the stock – were publicly owned but didn’t have the same voting rights as the A shares. So although the Edgars owned only 37% of the value, the share structure meant they had more than 50% of the votes at board meetings.

I had no doubt the City would be behind my bid, but I was pleasantly surprised to learn that many of the Edgar family felt that way too. A large proportion of the A shares were still owned by aunts, uncles and cousins of the man in charge, Anthony Edgar, the son of the founder. Being the sort of family they were, they read the Telegraph and Brewerton’s suggestion had hit the right note.

For the past couple of years they had seen Tony Dignum, a new chief executive brought in after making a success at Dixons, oversee a period of relative decline at H Samuel. Many family members could see that under the current management, it was entirely possible that the value of their shares could fall even further.

I received a phone call from Morgan Grenfell, the merchant bank, saying it had been approached by family members who had read the article and wanted to sell their shares. Their holding represented 27% of the A shares, and Morgan Grenfell negotiated to buy them for £7m cash. It was a small amount of money and, as Ratners was now so profitable, I actually had £7m in the bank.

While the deal made some members of the Edgar family happy, I knew there would be one Edgar who would resist my advances. I had known Anthony Edgar for many years and I knew that, although we had a lot in common (namely that we both ran our fathers’ jewellery businesses), we weren’t very alike.

At 45, he was only 10 years older than me, but he behaved like he was from another generation. He was the kind of guy who wore plus fours to play golf and went shooting at the weekend. I knew that telling him an upstart like me wanted to take over his business wouldn’t go down well, so when I walked into his office for a meeting, I took a different tack: “I think we should merge.”

I talked about all the market advantages we would have, the economies of scale, and the reductions in overheads, but he didn’t want to hear any of it. “I don’t want to merge with you,” he said in a way that made Ratners sound like it was the shit on Samuel’s shoe.

The Edgars also owned the prestigious Watches of Switzerland chain that sold £500,000 Patek Philippe pocket watches: he really didn’t think I was fit to own any of his company. “You may have 27% of the shares now, but all that lets you do is attend the annual meeting and put your hand up and vote. It doesn’t give you any power because I still own 30% and my mother owns 11%.”

One of the first phone calls I made after that meeting was to Morgan Grenfell. “His mother owns 11%. Do you think she’d sell?” I said.

The brokers set up a meeting with her, and when I met her a few weeks later I thought she was like some dowager duchess out of Jeeves and Wooster – not the kind of person I was used to dealing with at all. After a suitable amount of small talk, I brought up the idea of a merger.

“Oh yes, I’ve been reading a bit about that. I think that’s a marvellous idea. There’s just one thing . . .”

“Yes?” “Well, I’m not really all that sure that Anthony should run the merged company. He’s totally unsuitable really. Don’t you think?”

I was stunned but tried very hard to keep a straight face. After that, negotiating to buy her shares was pretty straightforward – I knew our profits meant that borrowing the money would be easy – and of course that would mean I had more shares than Anthony. Naturally I leaked this little matter to the press, and slowly the pressure on him started to build.

It became clear that the City had lost faith in him and Tony Dignum, and their share price began to tumble, which made them very vulnerable to a takeover. H Samuel desperately needed some credibility, and suddenly a merger sounded like a good option.

A week before Samuel was due to announce its annual profits my phone finally rang: it was Anthony Edgar wanting to negotiate the terms of a merger.

Had I been playing snooker with my friends Charles Saatchi and Michael Green that afternoon – as I regularly did – it would have been a good time to brag a bit. In less than two years as chief executive, I had transformed Ratners: we had a market value of £40m, we had 180 shops and our share price was now nudging 200p. Despite all this, I had been paying myself a salary of only £35,000, and I knew that when the ink was dry on the Samuel deal, I could put a zero on the end of that figure. I had every reason to feel ecstatic.

It had been my ambition to make Ratners the biggest jeweller in the country, and with this merger I would achieve that. The merger sent us into the big league: we would have a combined market value of £190m, we would be leaping from 180 shops to over 600, and we would own some of the most valuable retail property in the country because Samuel owned the freeholds of 50% of their shops.

I went home that night on a high. My wife Angela and I had not long moved to a fantastic house in Highgate overlooking Kenwood on Hampstead Heath, and as I parked in the driveway and locked my Porsche, I think I probably thought I had it made. That night, however, when the kids had gone to bed, Angela told me she wanted a divorce.

She was fed up with me coming home late, with not being able to talk to me because I was too tired, with me reading the paper when I could have been helping out with domestic matters, and with me being short-tempered when she asked for help.

“You’re always in your own world,” she said, “so we might as well be apart.”

A few days later, I turned up for my meeting with Anthony Edgar at what was called H Samuel’s “head office”. In effect it was Anthony’s home – a fabulous townhouse in Arlington Street off Piccadilly – but as it was company property it had to be used for business occasionally to keep the taxman happy.

I had barely eaten since Angela’s bombshell, and I felt incredibly weak. His wife Sarah answered the door.

“You’re looking well, Gerald. Lost a bit of weight?”

“I’m on a diet,” I lied, as I refused another tray of canapés.

Anthony turned up half an hour later as he had gone for a drink in the Blue Lamp pub opposite the house. I realise now that I rarely saw him sober. He was accompanied by his personal accountant, and they quickly told me that they would agree to a merger.

When Anthony insisted on being chairman, I said that was fine, as long as I was chief executive. I had a hunch that the City wouldn’t stand for such an incompetent chairman for long. His next condition was that he should be allowed to bring his board members with him. Samuel’s board had only three members, so I agreed if I could bring four of my own six board members. So long as I had more people than he did, I would have control over the merged company, and that’s all I wanted.

It meant I would have to ask my father, founder of Ratners, to step down from the board. I went to see him and told him.

“Are you sure Anthony Edgar wants to do the deal?” he asked.

“Of course.” “It’s just that I was at Brent Cross the other day, and I was looking in our window. It looked like a market stall with all those posters and watches hanging down from the ceiling. Are you sure he wants to be associated with a business like that?”

“Yes, Dad. I’m absolutely sure.” In some ways, this had been a real rite of passage: the baton had been handed from one generation to the next and it felt great to know I was carrying on the family business and making Ratners a household name. I couldn’t quite believe that I owned H Samuel. This was the company my parents had held up as the benchmark when we had talked about business over dinner. Now it was part of Ratners.

Of course, merging two companies with two cultures and two staffs wasn’t without problems. I had a series of meetings with City investors to reassure them about the debt we had taken on to secure the merger, and somehow Anthony knew whenever I was with them. A secretary would always knock at the door and say, “There’s a call for you, Mr Ratner.”

Often Anthony was incoherent and just wanted to tell me he was at the Henley Regatta or Ascot or some other function. He clearly couldn’t stand me running the company and wanted to find ways of letting me know he was still around.

I found his behaviour intolerable. I felt I had no choice but to take legal advice about removing him.

“You’ll have to be careful,” I was told. “If it looks like you entered into the merger under false pretences, he could sue you. He could reasonably say your intentions were a takeover and that’s not what he agreed to.”

“But I cannot work with this man. Isn’t there anything I can do?”

My lawyer thought about this for a while. “Well, if you can prove that you’ve worked with him for three months and have found the situation untenable, then you might just get away with removing him.”

When the time limit was up, I went to see Anthony and told him that it wasn’t working.

“You’ll have to go,” I said, knowing full well he wouldn’t go quietly. A substantial pay-off helped though. His two board members went soon afterwards.

I became chairman and chief executive, a dual role that allowed me to increase our rate of expansion and implement changes at remarkable speed. Ratners continued to perform strongly, its share price was rocketing, and the City was pushing me to expand even further.

Agreeing to meet brokers’ growth forecasts is a bit like making a pact with the devil. Although the rewards are enormous in terms of bonuses and share options, the pressure can take its toll in terms of bad decisions or growth at the expense of consolidation. But this was the 1980s, and it was all about growth, and executives like me who could deliver it were treated like royalty, and once you had a reputation like mine, you fought hard to keep it.

Having acquired H Samuel, I bought Britain’s other major high-street jeweller, Ernest Jones. The group now represented over 40% of all jewellery sales in the UK, and that gave us a lot of negotiating power with suppliers.

For instance, Ratners, H Samuel and Ernest Jones all stocked Seiko watches, so I could go to them and say, “Right, I want a better deal.” I didn’t need to threaten to stop stocking or promoting their product: they knew the clout we had, and so they would offer us incentives, like if we sold £30m worth of watches, they would give us a 2.5% retrospective discount. That instantly boosted our bottom line by £750,000, and when we did deals like that with all our suppliers, the profits we reported to the City leapt up each quarter.

And still I was determined to expand further. It’s always hard to know exactly what drives someone in my situation: I had more money than I could ever spend, the ear of Margaret Thatcher, the most powerful politician for a generation – I’d been invited several times to 10 Downing Street and had had a private lunch with her – and my name illuminated on every high street in the country. The only explanation I have as to why I chose to continue to expand is ego. Like many other operators in the 1980s, I had an enormous ego.

Looking back, I can see that I was having fun, but I also remember that the business and its success wasn’t making me happy at a fundamental level. My income brought me a very nice lifestyle, but the truth was I didn’t really understand the value of what I had, not in personal terms, and therefore I didn’t appreciate what I had beyond a few bragging points with Charles Saatchi and Michael Green.

That made me slightly uncomfortable. I knew I had things that other people didn’t have, and I knew that many of them were frivolous. I look at it now like a 23-year-old Premiership footballer who goes out and buys a Bentley with his weekly pay packet. If he crashed it, he might not even bother to repair it, and I know for sure that he doesn’t get nearly as much pleasure driving it as the 50-year-old who has saved for years to buy his Bentley.

As I was to find out a few years later, one of the silver linings of losing everything is that you discover the true value of possessions. I’m not saying that money doesn’t make you happy, but I do believe that only a certain amount of money makes you happy. Above a certain level you get into the law of diminishing returns. Buying more stuff doesn’t make anyone happy in the long term.


© Gerald Ratner 2007

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