There is a new family running Khoury Home. Since 2011, Lebanon’s largest household appliance and electronic retailer has been suffering financially in the face of rapidly changing economic conditions. As of this past January Romen Mathieu, managing director of the EuroMena private equity funds of London-based financial institution Capital Trust Group, stepped in as chief executive to turn the company around.

“It was a rescue operation,” says Tony Khoury, as he explains why he and his brothers agreed at the end of last year to sell the company they founded from scratch for $30 million. “A rescue operation for my brothers and me, for the new investors, for our partner, for the banks, for the suppliers and most importantly for the employees,” he says.

At lunch in Dbayeh, Tony looks refreshed and energetic as he reflects on his laborious years sweating and grinding away to take the company from a small showroom with just four employees in Lebanon’s Elissar neighborhood, near Antelias, in 1998 to its peak in 2010 with around 800 employees and sales of $110 million — 15 percent of the home appliance industry’s annual sales of $718 million. “We are the mother of the boy,” a common Arabic phrase he proudly repeats several times during lunch as he shares with Executive the history of the company he feels so strongly attached to but that is now run by a private equity firm.

How it all started

Tony’s father did not believe in his son’s ambition initially. Running a consumer electronic wholesale business, his father was wary of venturing into the retail operation, but Tony was persistent. The second of three brothers — each of whom had an equal stake in Khoury Home — Tony was the only one without an academic degree: he says he was not bright enough, but he had vision. Insistent on turning their Elissar warehouse into a showroom despite his father’s criticism of the idea, his ambition drove him further after electronics company Khattar opened a store in the area.

“I went crazy when Khattar opened,” he says. So his older brother Georges convinced their father to let him try it out. The showroom quickly turned into a cash cow from the first year of operation. “I told Georges, ‘I can’t believe it. I want a showroom.’ That’s it,” recalls Tony. That’s when Moussa Farhan, a family friend with significant retail experience, gave him the idea to go to Beirut.

While the Elissar showroom may seem like the starting point for Khoury Home’s success story, Tony sees the year 2000 as the real beginning. That was the year they opened the Dora flagship store. Crossing the Dora bridge with his brother Georges, he pointed at the room and said, “I want that store”. Georges told him to forget about it; they couldn’t afford it and “even Mama said ‘You want to be next to [electronic retailer] Kettaneh? He is a mountain, he will swallow you.’”

The company is one of Lebanon's best-known brands

One year later, Tony secured the Dora store, 700 square meters then, and started hiring. One of the first employees on board was Ameen Barbar who, 13 years later, is now Khoury Home’s commercial manager. “I was trained by Tony Khoury, an expert on sales, on the products, on the perfect way to run the business. I gained a lot from him,” says Barbar.

Tony was involved with the nitty-gritty of the business, from setting the pricing, training employees and selling to customers, to working on the advertising and expanding the business. He even worked from the hospital bed while battling blood cancer. His relentless efforts seemed to have paid off, when the showroom in Dora was expanded by 2,500 square meters in 2002 — a welcome sign of the company’s success.

Farhan, the family friend who had originally pushed him toward Beirut, eventually bought a 40 percent stake in the company for “about $250,000” on the tails of the company’s growing success, Tony says. Did the Khourys need the money, since the company was bringing in revenues then? “No, but he is a mountain by our side in case something happens,” Tony explains. From the start, Tony was willing to allow a more experienced investor to join him in his endeavor to take the company forward.

The company has seen its sales shrink as economic conditions have worsened

As Tony enjoyed the taste of success, his appetite for it grew, and he became more aggressive on the market. With his advertising partner, Fido, he worked on branding and strategy: “Khoury Home, ma bisakir wala yom” a rhyming tagline that means ‘Khoury Home does not close a single day’. He placed advertisements in Al Diyar newspaper: “fridge + freezer + oven = free microwave” and his ad expenses reached up to 3.6 percent of sales, compared to an industry average of 2 to 3 percent. The Khourys’ ambition to expand abroad led the company to study the Syrian market, securing a location there and planning to open its first store in 2011, the year the country took its first steps toward civil war.

Mounting challenges

In addition to the crisis in Syria and a deteriorating Lebanese economy, Khoury Home experienced tougher competition in 2011. Opening several stores next door to Khoury Home’s outlets, Hokayem Brothers began eating into the market share of Lebanon’s largest household appliances and consumer electronics retailer. Hokayem Brothers was selling products at cost or at a loss.

To eliminate the competition, the Khourys decided to absorb Hokayem in March 2011 at an initial price tag of $24 million: $14 million for the merchandise and equipment and $10 million for the goodwill. The valuation of the competitor was based on figures provided by Hokayem with 2010 revenues of $50 million, an amount that turned out to be highly overstated.

The acquisition became more expensive and much messier when a second set of $10 million bonds appeared in the market. According to anonymous sources, BLC, the bank facilitating the transaction, had requested that the Khourys sign another set of $10 million bonds as the first set were “badly written”. So the Khourys signed the second set, but the first were never destroyed. After months of deliberation, a settlement worth $7 million, according to Billy Hokayem, was reached putting the matter to rest. BLC’s general manager Raoul Nehme refused to comment on this issue, citing banking secrecy.

“If you check the boxes on the don’t do’ list when acquiring a company, the Khoury family would score A-plus,” says current Khoury Home chief executive Mathieu, who remains astonished until today about the hasty acquisition and its minimal three page contract. As for the bonds story and the final price paid, Mathieu only knows the market rumors. He met Hokayem for a five-minute coffee one day and asked him about the price paid for the company. “He said the price the Khourys told you [$24 million] is correct” and when Mathieu then asked why he claimed that the price is much higher, Hokayem replied “I have my personal reasons”. Mathieu left it at that. “Nobody knows what happened; only Georges and Tony Khoury can tell you”, says Ramzi Ackawi, Khoury Home’s longtime auditor. “We don’t want to talk about it,” says Tony. “Even if it was our mistake, we are the mother of the boy.”

While the issue surrounding the price paid for Hokayem remains obscured, one thing that the different stakeholders interviewed agree on is that on a long term basis, the acquisition was a great step for Khoury Home, as it eliminated its strongest competitor. “Thank you Khourys for buying Hokayem” says Mathieu. But for the short term, it was a complete wreck, one that the EuroMena team plunged into in November 2011, unaware at that time of the extent of the mess they were about to place their hands on.

And Euromena steps in

From the launch of Capital Trust’s $100 million EuroMena Fund II in 2009, Mathieu had set his sights on Khoury Home. As the Fund was looking to invest up to $15 million in each private equity participation, or ticket, opportunities in Lebanon were scarce, and Lebanon’s leading consumer electronic and household appliance retailer looked appealing. The Khourys were reluctant to sell a stake back then, but Mathieu persisted. It wasn’t until 2011, soon after the acquisition of Hokayem, that the Khourys decided it was time to bring in new blood. “I thought they didn’t need capital at that time. It appeared later on they needed capital badly and they didn’t say,” says Mathieu.

In September 2011, Khoury Home was valued at $70 million; its 30 percent stake in Astrum, the company that holds the Samsung license in Syria with its assembly factory in Jordan, was valued at $4 million, bringing the total value to $74 million. EuroMena invested $13.5 million for a 16 percent stake, $6 million of which went to increasing the capital of the company, with the rest going to the Khoury brothers. With a 2011 net profit forecast of $7.7 million for the combined group — Khoury Home and Hokayem — the valuation equated to nine times the expected earnings versus an international industry average of 12 to 13 times. EuroMena was aiming for a much lower valuation, closer to $60 million, so to hedge against the hefty price tag, Mathieu requested a put option: the right to sell EuroMena’s stake at $21 million in four years time if an agreed upon level of profits was not generated annually.

To guarantee the minority rights of EuroMena’s investors, he also put in place a solid shareholder agreement with representations and warranties, ensuring that the sellers are providing a true account of all information. With such a contract in hand, EuroMena would be able to mitigate risk in case of a significant financial loss. With the deal signed, Mathieu finally invested in the flourishing company he had set his sight on more than two years ago.

The turning point

A month after closing the investment in Khoury Home, the second set of bonds started to emerge in the market. As the bonds were held on the personal account of the Khoury family, Mathieu was unconcerned. EuroMena was shielded but he didn’t “want a plane without a pilot” he says. By December 2011, turbulence between the Khourys and the Hokayems on the bonds and the exaggerated financial statements was mounting daily.

Mathieu was fuming when he first heard, on February 24, 2012, that the company would be reporting a loss for the previous year instead of the expected profit figure of nearly $8 million. “Either you are not aware and you are discovering, like me, that you are making a loss, which is unjustifiable — or you are aware and making yourself unaware in front of me, in which case Romen Mathieu will be your enemy from now on — or there is an excel error and your finance team needs to go home,” Mathieu recalls saying, as he looks back at that dreadful shareholder meeting.

Mathieu has tried to get Khoury Home back on track

That’s when Mathieu decided to fight for control of the steering wheel — or as much control as as he could get as a minority shareholder. He pushed for an external director, and the Khoury family did not resist. In fact, they too saw the urgent need for new managers and hired Cesar Chalhoub — one of their suppliers at Lebanon’s Information Technology Group — as chief operating officer in February 2012.

“I was kind of a COO without the full authorities of a COO,” explains Chalhoub. Joining a family business from an institutional company was not a smooth ride, and he faced difficulties with “the corporate governance of managing a business of this size with over 700 employees” he says.

When the losses for 2011 were announced in March 2012 at $1.3 million, the EuroMena team increased their stake in Khoury Home. Through the clauses within their contract, they increased their stake by 5 percent in June 2012 to 21 percent without paying an additional dollar. This meant that along with Farhan, the previous minority investors now held 51 percent of the company; the Khourys no longer had a controlling stake. The exit sign was not too far away.

Venturing too far

There is no doubt that the Khoury’s reputation in the retail business is a solid one. Speaking to their employees, suppliers, accountants, bankers and lawyers, one can sense the respect and admiration that the brothers have earned throughout the years. “Tony Khoury treats his employees as if they are his own children,” says Caroline Khoury, the company’s human resources manager. “I’ve always had an excellent relationship with the Khoury family” says Eddy Cherfan, CEO of Cherfan Tawil Company, the distributors of Samsung and Khoury Home’s largest supplier.

So what went wrong? Why are the Khourys out of Khoury Home? As the Khourys expanded in Lebanon, their appetite for risk grew voraciously. With the Hokayem acquisition, they also started venturing into the real estate business.

“This is the problem of most families. When they start to succeed, they get greedy and they think whatever they do will be as successful as their other businesses,” says Ackawi, Khoury Home’s auditor.

“The Khoury family had a vision that Lebanon would continuously grow and nothing bad would happen,” adds Barbar, Khoury Home’s commercial manager. “They invested a lot in huge showrooms, furniture, etc. while the country went into an economic crisis.”

A glimpse at their debt picture reveals a clear red flag: it went up to $32 million in 2011 from $15 million in 2010. The Khourys had become too ambitious, and they started to lose control of their empire.

With the company recording a loss in 2011, the family needed capital to fund their new real estate operations. So in 2012, they turned to Khoury Home and took personal loans. According to Mathieu, the Khourys owed up to $7 million to their various real estate businesses, an insignificant sum relative to the value of their property. Revenues dropped from a peak of $110 million in 2010 to a low of $96 million in 2012, just a 13 percent fall, but the company also owed money to suppliers, bankers, advertising agencies, etcetera. Its net cash position was in the red by $4 million at the end of 2011. “Instead of selling a land or asking the banks for an extension, they wanted to wait for the real estate to go up again, and so they took money from Khoury Home,” says Mathieu.

EuroMena was not happy. Khoury Home’s actions were proof of poor corporate governance practices, a wrongdoing Mathieu would not look past. “What you are doing is not acceptable. I would advise you to take a lawyer,” said Mathieu in a warning to the elder brother and company chairman Georges Khoury, in July 2012.

Not too long after that threat, the Khoury brothers, along with Farhan, and Mathieu started the mediation process. Discussions kicked off with Roger Dib, founder of the Near East Consulting Group, which specializes in corporate governance, and with auditor Ackawi to find a solution.

With the Khourys and Farhan sharing ownership across the entire group, reaching a consensus proved to be a Herculean task. “Their group is like the intestines of a pig: one company owns a part in another, one company is indebted from another and invested on account of another, etc.,” says Mathieu.

Still, a formula was reached in September 2012, the year the company lost $5.8 million. The agreement, closed in December 2012, valued Khoury Home at $56 million, down 24 percent from its $74 million valuation a year earlier. Farhan paid $30 million to the Khourys to acquire an additional 40 percent stake in Khoury Home as well as their share in the real estate businesses— making their total exit worth $37.5 million. The family’s remaining 9 percent was given to EuroMena at no additional cost in exchange for their approval of the deal and dropping their put option. Over and above, Farhan reimbursed Khoury Home the $5 million that was withdrawn by the family during 2012.

Farhan, who did not want to be interviewed for this report, also requested that Mathieu become CEO of the company. Mathieu agreed on one condition: that Farhan would place 30 percent of his share — leaving him with a 40 percent stake — into EuroMena’s holding company, therefore granting the holding direct ownership in 60 percent of Khoury Home, a majority stake.

“We are in a Maronite marriage Moussa and I; I respect him for giving us the keys of the house,” says Mathieu. Farhan’s goal is to sell 40 percent of his ownership to strategic investors by mid-2014 via private placement, in order to reinforce the shareholder structure. The Khourys are bound by a non-compete clause, legally forbidding them from venturing into this industry for the next ten years.

Changing of the guard

“We miss them,” says Barbar who has deep admiration for Tony Khoury, the man he says “taught him everything he knows today”. But the new investors have created “a family spirit” in the company.

“Of course when the new owners took over we were scared, but the fear was quickly controlled by the new management,” says Zeina Tawaji, a niece of the Khoury brothers. She still works at Khoury Home as the commercial team’s executive assistant.

Mathieu began his reign over Khoury Home in January 2013, as the new CEO. With his helmet on and his sleeves rolled up, he rides his motorbike back and forth between the offices of EuroMena — where he remains fund manager of investments worth $170 million — and the Dora headquarters of Khoury Home. With no industry expertise, Mathieu reached out to Thierry Falque Pierrotin, former CEO of London-based multinational electronic retailer Darty, and asked him to become an advisor to Khoury Home. Visiting Lebanon every six weeks since February, Falque Pierrotin has been advising the top and middle managers on how to run a retail operation. Over a coffee in Beirut, he explains how the main challenge for the company now is to change the culture and increase the speed. “The company’s culture has to evolve from a family-owned one to one where you formalize more the processes, you put more time into all the subjects and more speed and you are in a position to measure your success; for me it’s about speed” he says. As for the board of directors, Mathieu has brought on Roger Dib as well as Charles Hajj, a former managing partner at consulting firm Booz&Co.

Falque Pierrotin’s advice is being taken seriously, and the new management is in the process of implementing a rigorous restructuring plan. After Chalhoub put his hands on the inventory, the net cash position went back in the black, standing at $8 million at the end of 2012 and allowing Khoury Home to pay back its suppliers this year.

A deal was negotiated with Lebanon’s International Advertising Association saving Khoury Home $450,000 on the hefty advertisement payment of $2.3 million owed by the company to its former agency, Fido. “I wanted to absolutely do this. If media is against you, it’s a disaster” says Mathieu. The advertising budget, handled now by M&C Saatchi, was streamlined from $4.2 million in 2011 to $3 million in 2012 to $1.7 million today.

Headcount has dropped from 800 in 2011 to 620 in June 2013, with an aim to reach 590 by the end of the year as temporary employment contracts are terminated. Stores are being eliminated: three have been shut down this year, and the total now stands at nine, down from a peak of 13 in 2011. The combined footprint of the stores is 12,000 square meters, down from 18,000 in 2011.

And Chalhoub has addressed the inventory surplus. Inventory had reached a staggering $38 million by the end of 2011. “They were buying without awareness; it was pure craziness,” says Mathieu. By the end of 2012, it had dropped to $19 million and is targeted to fall another $2 million by the end of 2013.

Moving forward

As of April, Khoury Home’s EBITDA, a key earnings figure, was positive for the first time in two years, and the new managers forecast profits of $2 million for the year.

They are enthusiastic about a five-year contract signed in June with Lebanese retailer BHV, to feature one another’s products in their stores. It is part of Khoury’s strategy to optimize space. “I admire the professionalism of the Abshis [owners of BHV],” says Mathieu as he explains how the deal was signed within two months. “I congratulated Romen on the BHV deal; it’s a great move,” says Tony who still gives advice to Mathieu whenever he is asked for it. Khoury Home intends on expanding into markets beyond Lebanon alongside BHV and might change its name for these ventures; for Lebanon though, Khoury Home’s name will not change.

Mathieu aims to cover areas in Lebanon still untapped by Khoury Home such as the south and the Bekaa, beginning in 2014. As for Syria, he will be looking to expand there when the war settles. Khoury Home still owns a 30 percent stake in the Samsung franchise in Syria. He also has his sights on Egypt and Palestine. He has already met the head of Sbitany Home, Khoury’s counterpart in Palestine, to discuss potential synergies.

For now, the focus is on growth in Lebanon, where Khoury Home commands the largest share, 14 percent, of the country’s household appliances and consumer electronics market. The ultimate goal of EuroMena is to divest its stake – ideally by 2018 – and repay its investors two- to three-fold.

Was it in Mathieu’s mandate to become CEO of Khoury Home? After all, EuroMena is not a buy-out fund, but as fund manager, Mathieu has the authority to own the company and take control if need be to prevent an investment from being a flop and dragging down the entire EuroMena fund. Eventually, Mathieu will have to move on as well. As the manager of two funds totaling $170 million and soon a third fund which he is raising up to $200 million for by the end of the year, Mathieu has other priorities to return to. “My objective at Khoury Home is to empower the managers,” he says. With the leadership of Chalhoub, the services of Falque Pierrotin and a solid board of directors, Mathieu’s main role now is to oversee the implementation of the reorganization plan.

Lessons learned

For EuroMena and Mathieu, due diligence will never be the same after their investment in Khoury Home. For future investments in companies that have just completed an acquisition, due diligence will be conducted on both companies as if they are being bought individually. EuroMena will also scrutinize managements’  abilities to reign over newly formed companies, prior to completing the investment.

But at the end of the day, EuroMena’s investors’ rights were protected. Through a solid shareholder agreement with clauses mitigating risk, EuroMena was able to turn the situation around and take over control. Had it not been for such a rigorous contract, the investors might have lost some of their capital and Khoury Home might have not been saved.

For a prominent, family-run business to hand the keys over to a private equity fund is quite an unusual development in this region. Tony Khoury was right to bring in new blood to save Khoury Home. Partnering with strategic and professional investors propels family-owned businesses to implement solid corporate governance standards — from internal controls to a succession plan — and ensure their continuous growth and success. After all, some of the largest companies today, such as the United States’ Wal-Mart, Korea’s Samsung and India’s Tata Group, are family run businesses.

Tony Khoury may not have a degree, but he is a very bright man, who has established one of Lebanon’s most successful companies, one he continued to toil over even while battling cancer. While he and his brothers might have grown too ambitious and failed to adapt to changing economic circumstances, they were sharp enough to let go in order to save the company and its employees — not an easy decision to make. He again makes the comparison to the woman who, under King Solomon, gave up her son to another woman, rather than see him split in half.

“We are the mother of the boy,” he says.