Jan 13, 2010
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Consumer gloom puts UK retail IPOs at risk

Jan 13, 2010

The good news for some, like pet products chain Pets at Home, is that private equity firms are finding it easier to arrange debt financing, which could provide determined sellers with an exit route.

But that may not help fashion group New Look, which some bankers think is too large for a private equity deal right now.

With investors wary of a repeat of Debenhams' (DEB.L) flotation in 2006, when the store group's shares fell steadily over the next 2-1/2 years, New Look may struggle to reach the 1.7-billion-pound ($2.7 billion) valuation initially flagged.

"There are a number of things going against it," said David Bush, head of retail services at advisers Grant Thornton. "If they are going to go down that route (a flotation), I think they've got a pretty small window of opportunity to achieve it."

Shares in Britain's non-food retailers .FTASX5370 leapt 70 percent last year as investors bet on an economic recovery.

Retail IPO candidates, including online grocer Ocado and fashion company SuperGroup as well as New Look, have done themselves no harm by reporting robust Christmas sales.

But despite the strongest festive season for four years, the sector has drifted lower recently as investors worry that steps to cut government debt -- like hiking taxes and cutting spending -- will pile new pressure on shoppers.

Bellwether chain Marks & Spencer (MKS.L) warned last week that British retail sales could be flat in 2010, with trading getting tougher as the year progresses.

These conditions are not a helpful backdrop for retailers weighing up whether to test fragile IPO markets.

"I don't personally think there is going to be a massive amount of appetite out there because I don't think retail is a very exciting place to be at the minute," said one fund manager at a large long-only fund firm on condition of anonymity.

"Any business that tries to come to the market will have to come cheap enough to reflect that outlook."

While the broader flotation market flickered back to life late last year, it has not been a convincing recovery, with fund manager Gartmore (GRTR.L) pricing its listing at the bottom of a range that was reduced during the IPO process.

Richard Lowe, head of retail and wholesale at Barclays, said groups that have proved their mettle in the downturn would be able to float, and one successful debut could encourage others.

"All investors are looking for a growth story," he said. "You want the first one away. You want it to be a big name."


But the failures of the past cast long shadows.

New Look, which said last week it had not decided whether to press ahead with an IPO, would be the biggest retail flotation in London since Debenhams, and therein lies part of its problem.

A debt-laden Debenhams was listed by its private equity owners at 195 pence, but its shares fell as deteriorating trading conditions raised fears about its ability to pay off its borrowings. They only staged a significant recovery after Debenhams raised 300 million pounds in a share sale in June.

New Look's supporters are at pains to point out the differences with Debenhams.

The group, taken private in 2004 for 699 million pounds by founder Tom Singh and private equity firms Permira [PERM.UL] and Apax [APAX.UL], will use any money raised from selling new shares to pay off a big chunk of its 1 billion pounds of debt.

It has also spelled out ambitious plans to double selling space in Britain and step up its online and international sales.

Grant Thornton's Bush, however, is not won over.

"They're already pretty big in the UK and I'm struggling to see where they can take it ... The sector they're in is absolutely cut-throat," he said.

One head of UK equities at a large fund firm also said New Look would have to accept a knockdown price because of its debt.

"Why should we invest on the same kind of valuation metrics and yet with far, far higher level of debt than a Home Retail (HOME.L) or Next (NXT.L) or even these days, a Debenhams?" he asked, speaking on condition of anonymity.

Sources close to the matter say New Look has also attracted interest from private equity bidders, and with signs that debt funding for takeover deals is starting to return, this may prove an easier exit route for many retailers.

Pets at Home, in particular, has attracted strong interest, with competition from buyout firms helping to push the bid price above 700 million pounds, sources close to the matter said.

But New Look might be too big a deal for now.

"The big ticket LBO (leveraged buyout) market is still pretty fragile," said Andrew Ware, head of corporate finance at accountants BDO Stoy Hayward.

"To swallow it would be quite tough, I would think. You'd need two or three of the houses to get together. That could happen, but it would certainly increase the deal risk." (Additional reporting by Raji Menon, James Davey and Daisy Ku, Editing by Sitaraman Shankar)

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