Findel's £1 sale of Webb DVD arm to Endless

The Leeds-based private equity house pledged to invest 15m in Webb, which has been starved of trade credit.

Webb, which sells games, DVD and music via its two subsidiaries, Choices UK and Webb Ivory Burton, made underlying earnings of 1.7m on revenues of 53m in the year to the end of March.

Findel, based in Burley-in-Wharfedale, is focusing on its core activities of home shopping and education and was keen to offload the business to free up working capital.

"It's a business that if it had sufficient cash resources in place could perform a lot better than it has in the last year or so," said Endless managing partner Garry Wilson.

"It's a tough sector to be in but we have to look at the example in the retail sector set by HMV. The last man standing can make good profits."

Webb employs about 250 staff, split between Burton-on-Trent and Bradford. The business has around 600,000 mail order customers, who are sent catalogues 10 times a year. It also supplies retailers including Wilkinson, Spar and hundreds of convenience stores.

Findel acquired the 70 per cent of Webb it did not already own last July for just 3. At the time it said: "The board believes that the acquisition of Webb will be earnings enhancing for the group."

However, in April Findel was forced to make a 61m impairment writedown, of which 45m related to Webb. At the end of December 2008 the business had net liabilities of 37m and gross assets of 51m.

Endless specialises in turning around struggling businesses before selling them on. In March it sold Sheffield engineering firm DavyMarkham in a deal worth more than 9m, after buying it for a nominal sum in 2007.

Webb saw trade credit dry up following the administration of retailer Woolworths in late 2008, forcing it to rely substantially on its parent company for funding. Findel said offloading it will release 15m to 20m of working capital, although profits will fall by 2m.

Endless's cash injection will be used for both working capital and investment. Mr Wilson said a shortage of cash meant Webb was not able to keep sufficient stock. He said Endless will provide "several million" pounds more working capital than Findel was able to.

"It was taking too long for the company to fulfil orders in a part of the market where retailers and customers demand next day service. They did not have enough inventory."

Findel was particularly keen to offload the business before the build-up to the Christmas period started, added Mr Wilson, because it requires a significant investment ramp-up.

While there was competition for the business, Endless said it won the bidding thanks to its rapid completion. "We are pleased to have been able to deliver this deal to Findel in an extremely rapid timeframe of less than two weeks from agreeing heads of terms," said investment director Mathew Deering.

KBC Peel Hunt analyst John Stevenson said he was "not particularly surprised" by the disposal.

"It's not in the scheme of things that material (for Findel)," he said.

"For them it's about cash and what's core and non-core. What they are releasing is a fairly substantial amount of working capital."There was a point in time when Woolworths and EUK went down – then there was an opportunity for Choices.

"That business can be developed and Choices is certainly up there, but it's a working capital-intensive model."

KPMG advised Findel on the disposal. Christian Mayo, KPMG's head of corporate finance in Leeds, said: "Findel's sale of Webb was achieved in a tight time frame and, while for a nominal sum, is good for Findel, given Webb's significant working capital demands and therefore investment requirements."

Steering a course in tough times

Findel has seen a raft of changes in recent months as it concentrates on its core home shopping and education and runs the business for cash.

In April it parted company with chairman Keith Chapman, who spent more than a quarter of a century with the business.

No reason was given for Mr Chapman's departure, but analysts said a change of management was vital for investors to regain confidence in the company.

Findel also parted company with its chief executive Patrick Jolly earlier this year.

Mr Chapman led the company on the acquisition trail, snapping up a number of internet-based companies during the dotcom boom.

However, when the recession arrived, Findel was hit by a tide of falling sales and bad debts, while owing bank debt of 344.7m. It closed its mail order brands Cotswold Company and Letterbox to reduce borrowings, and Mr Chapman and Mr Jolly navigated the group through an 81m equity issue to help to cut debts, which now stand at around 310m.