The £533m acquisition of Jimmy Choo by Labelux is the latest of a stream of retail M&A transactions to successfully complete since the credit markets reopened.

The £533m acquisition of Jimmy Choo by Labelux is the latest of a stream of retail M&A transactions to successfully complete since the credit markets reopened.

In spite of the continued gloom that hangs over high street Britain, trade and financial buyers have demonstrated a keen interest in making investments in retail and are willing to pay full prices for the right asset: according to S&P, the Jimmy Choo deal values the business at 13.5 times pro-forma EBITDA.

This auction demonstrates that, for the right asset, it is still a seller’s market. Private equity funds are under increasing pressure to deploy capital, eager to complete deals and build a successful investment record in anticipation of the challenge of raising new funds. 

At the same time, a dearth of larger deals has meant that large-cap funds are abandoning their usual hunting grounds to dip into the more active but increasingly crowded mid-market.

Trade buyers have not been deterred, as evidenced by the £215m acquisition of Kurt Geiger by Jones Group and the £130m acquisition of Schuh by Genesco.

In spite of this, prospective buyers remain disciplined and discerning. As the consumer outlook deteriorates, the landscape is becoming littered with failed processes. Most recently, TJ Hughes and Jane Norman failed to find buyers and fell into administration, while Maplin attracted strong initial attention from potential investors before the sale process was halted.

When picking winners, private equity will look for strong businesses with a differentiated proposition, proven management teams, a compelling growth story and exit optionality.

Jimmy Choo and Kurt Geiger offer the same exciting growth potential in Asia that enticed TA Associates to back the MBO of Cath Kidston.

The opportunity to take advantage of prevailing market trends through the roll-out of a discounted retailer saw Warburg Pincus pre-empt a sale process for Poundland. Bridgepoint and Charterhouse deployed capital to create category-killers with Pets at Home and Card Factory respectively.

Lenders backing leveraged deals have also become increasingly discriminating, with sources of potential debt finance narrowing as some reassess their sector appetite or reach exposure limits. Attention will focus on seasonality, cyclical exposure, like-for-like performance, margin structure, cashflow, market position and the extent to which consumer spend is discretionary.

Geographic footprint, rent profile, and the plans for and track record of any roll-out strategy are equally scrutinised. Larger retail businesses, including Phones 4U, DFS and Matalan, have taken advantage of the high yield bond market which has had record issuance in the first half of 2011. The M&A market appears resilient to macroeconomic shocks, although further tax increases, Government cuts and interest rate uncertainty represent potential clouds.

Despite consumer sentiment concerns, the M&A pipeline in retail remains strong, with Iceland, Wiggle and Aurum expected to change hands over the next 12 to 18 months.

Private equity is likely to continue to determine which auctions are competitive and which will struggle regardless of trade interest.

  • Jeff Blue Managing director, DC Advisory Partners