Are retailers more relaxed in private?

Private equity takeovers can give retailers valuable breathing space – but the new owners do want their money back, and that can mean cuts to the marketing budget, says Amanda Wilkinson

Woolworths and Somerfield are set to become the latest retailers to move out of the public arena of the stock market and into private hands.

Woolworths last week opened its books to Apax Partners, after the private equity company increased its bid for the retailer to £837m. Apax is also reported to be behind a £1.5bn bid for Somerfield, along with Barclays Capital and property entrepreneur Robert Tchenguiz.

It is up against two other bidders: the Baugur Group and a consortium led by the secretive Livingstone brothers, who own the David Clulow optical chain and a vast property empire.

Apax was also linked with an aborted bid for Peacock Group this year. Last year, it backed Tom Singh’s £699m buyout of New Look.

The potential rewards for turning around a company outside the scrutiny of the stock market are great, as Philip Green has shown with Bhs and Arcadia. Rob Templeman, too, made millions leading a management buyout of Homebase and floating Halfords. Now it looks as though he will make even more, with plans to float Debenhams, which he took private in 1993 with the backing of private equity consortium Baroness Retail.

For marketers, there is a risk that a change of ownership and the corporate status of a business can lead to job losses and cuts in the marketing budget. Once installed, the task of any new management, particularly when backed by private equity, is to knock the business into shape, either by cutting costs or taking a more defined direction.

Decisions by private equity-backed management, says Steven Silvester of Barclays Private Equity, will depend on what the business plan is: “If it is a cost-cutting plan, marketing may be under pressure.”

Former Hamleys chairman Simon Burke, who last year led Permira’s bid for WH Smith, which was pulled owing to pension issues, says that marketing in public companies can often be “unfocused” and “tries to do too many things”.

“Private equity cuts through that and gives a clear strategy for developing the business,” says Burke, now executive chairman of Irish supermarket chain Superquinn. “Private equity companies are very cash-focused and have a straightforward view of a business.”

This contrasts with public companies, which often get little guidance from shareholders, he says.

Private equity also enables management to take greater risks and look at more radical strategies when the business needs to be turned around, Burke adds.

Yet this does not mean management is given a free rein. Silvester says: “You can be a little more relaxed as you aren’t looking at quarterly returns or like-for-like sales, but I would expect there to be a demanding business plan. It doesn’t take the pressure off people to perform, it just means that the parameters are different.”

It is an environment that suits some companies more than a public listing, says Nick Gladding, a retail analyst with Verdict Research: “There’s a tremendous pressure on publicly listed companies to show constant profit growth and sales growth. There is not the same pressure on private equity-backed companies. That’s why some public companies have sought refuge in the private arena.”

Being public means that more information is available to the media. When times are tough, this can create a continuous stream of bad headlines, in turn affecting brand perception. J Sainsbury has found this, says José Marco-Tabares, a retail analyst at Numis: “Every time there is a problem it’s everywhere. If it was run by a private equity company it would be easier.”

Being out of the stock market spotlight also enables management to make hard decisions that according to Burke “are sometimes too horrible to contemplate as a public company”. For instance, closing an unprofitable subsidiary could send the share price plummeting, but a private equity owner may consider it a positive move.

Private equity companies generally look for a 25 per cent annual return on their initial outlay and seek to exit within four years via a float, trade sale or sale to another private equity company at a profit.

They are drawn to companies they think are undervalued by the stock market and which are strong cash generators. They have been able to take advantage of recent low share prices but, despite the fact that the retail sector is struggling with slowing consumer demand, share prices are firming up, with bid speculation making life harder for private equity companies.

Only last month, broker Numis issued a briefing note to investors, called Shop Idol, rating quoted retailers according to their attractiveness to private equity companies, using criteria such as property portfolio and cash-flow. It listed French Connection, Homestyle and Thorntons as possible targets, along with Laura Ashley and JD Group. But it warns private equity interest could dry up if the tough trading environment continues and starts to affect profitability.

For the time being at least, though, private equity companies are continuing to line up management teams to come in and run potential public targets.


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