The lukewarm reception from investors to the DFS Furniture IPO does not augur well for New Look’s chances of trying to float again.
Richard Baker of the private equity vendor Advent, the chairman of DFS Furniture, trumpets today in the flotation announcement that DFS stands for “Dedication, Family and Success”.
But investors seem to have decided that DFS stands for “Dull Furniture Sale” and it is hard to spin the news that the IPO was priced at only 255p – ie, very near the bottom of the lacklustre provisional range of 245p to 310p - as “a success”.
In early trading today the DFS share price was struggling to hold the 255p level, which will dismay advisers to New Look which is thought to be planning to try to float again this autumn.
Fund managers are paid to be cynical, so they are bound to have been suspicious of a cyclical big ticket retailer attempting to float on the back of a pre-election consumer spending recovery. Both VAT and interest rates are likely to be on an upward trend by the end of the year.
Many fund managers also have long memories and it is interesting that both DFS and New Look used to be public companies.
Back in 1993 DFS was floated on the stock market (valued at £271m) and its colourful founder Graham Kirkham famously bought Gainsborough’s painting Peasants going to market with part of the proceeds.
In 2004 Graham Kirkham took the company private again and then, in April, 2010 DFS was sold to Advent International for a reported £500m.
Since then DFS’s EBITDA has been stuck on a plateau of about £80m to £85m.
But things have begun to look more promising recently, with trading picking up, and, although the company has made no forecasts ahead of its interims on March 26, underlying EBITDA should be approaching £100m for the year ending July 2015.
The issue, of course, is what sort of valuation DFS should command at this point in the economic cycle.
The market capitalisation at the 255p float price is only £543m, implying an EV/EBITDA ratio of only around 8x (allowing for £200m of post-IPO debt).
That is a big discount to the valuation of some of last year’s high profile retail IPOs.
And given the stated aim to pay out 40% to 50% of after-tax profits, DFS offered investors a reasonable dividend yield of over 4%.
But DFS’s smaller rival ScS had to offer investors an 8% dividend yield at its 175p float price at the end of January, given its chequered history, albeit the ScS share price has actually done pretty well since it floated.
Talking of history, there is plenty of that at New Look.
Between 1998 and 2004 it was a public company and management were well regarded. I have fond memories of the new season range previews that fashion director Barbara Horspool used to conduct for analysts.
In 2004 New Look was taken private by the private equity funds Apax and Permira and, after no less than 11 years of investment, which is well beyond the normal timescale for these things, they are doubtless keen to sell. But willing sellers need willing buyers.
Much like DFS, New Look is clearly big enough to be a public company, with 569 UK stores and adjusted EBITDA likely to be about £210m for the year ending March.
But there is some more history here.
This time five years ago New Look had to abort a planned IPO because of strong institutional resistance to its mooted valuation and highly indebted balance sheet.
The business then suffered profitability collapse in 2011 as much-vaunted big new stores failed to work.
Although the new management team has done a good job since 2012 of steadying the ship in turbulent waters and the business is now “ready for an IPO”, according to chief executive Anders Kristiansen, New Look still has a lot to prove in a highly competitive UK fast fashion market.
New Look surely therefore needs to do more work on rebuilding its track record before trying to convince cynical investors again.
The big hope may be the growth potential in China but, given the problems that Marks & Spencer and many others have experienced there, good luck with that…
The new-look New Look management team may yet have a decent story to tell if they decide to try to float again this autumn and there is a price for everything, as the old stock market adage has it.
But investors know that the vendors can’t afford to fail again so the valuation will have to be very conservative.
- Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank.