Report Shows New Face Of Private Equity In Retail Buy-outs

The Age

Wednesday June 4, 2008

Ari Sharp

A REPORT has challenged the view that private equity takeovers will continue to wane, arguing that the high cost of credit is pushing private equity firms to restructure their deals rather than miss out altogether.

After a surge in private equity takeovers of high-profile Australian retailers in recent years, including Myer, Godfreys and Repco, the spiralling cost of debt has made the highly leveraged business model less attractive.

The PricewaterhouseCoopers retail outlook report said that while there would be fewer deals involving companies at the top end of the market in the next 18 months, the focus would shift to mid-cap deals.

"There's still plenty of equity in the market, with 70% of private equity funds remaining uninvested. However, due to the credit crunch, new deals need to be structured with 6% more equity," said PwC corporate finance partner Greg Keys.

The report said the high cost of debt would shift the balance back towards mergers among retailers rather than private equity takeovers.

"A corporation's ability to exploit synergies could enable it to outbid a financial investor which does not have a related investee company in its portfolio," the report said.

While private equity deals are down this year after an extremely active 2007, the number of takeovers of Australian companies is up. Figures released in mid-May by Dealogic showed that the number of takeover plays was up 22% compared with a year earlier, with the value of those takeovers zooming 59%.

Private equity players would need to focus more on operational improvements than on high leverage to drive returns, the PwC report said. Consolidation of smaller players in a retail subsector to rival one of the major players, such as Archer Capital's takeover of Amart All Sports, Rowe & Jarman and Rebel Sport, could also generate the synergies needed.

While the transaction multiples buyers could expect would be down, the report suggested buyers would go back to basics in their valuation analysis, placing greater importance on maintainable earnings.

Tanking share prices were likely to have pushed back the exit time frames for private equity firms as they waited for a recovery before selling out, but Mr Keys predicted next year would see a glut of departures.

"We're expecting up to 100 private equity exits in the first half of 2009 alone," he said. "This could cause some crowding in the market."

Private equity firms are expected to rely more on alternative exit strategies if the sharemarket fails to rebound strongly, turning towards a trade sale or secondary buy-out.

As well as grappling with a tight debt market, retailers are also grappling with a shortage of labour. The report said retailers needed to tailor employment packages to suit different generations of employees if they wanted to cut staff turnover.

While younger employees were found to be more attracted by performance-based pay, older employees perceived additional superannuation as critical. Other aspects of a package, such as training, fringe benefits, and even the ethos of the organisation, also varied substantially across generations.

© 2008 The Age

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