Business, London Loves Business, United Kingdom - Tue February 21, 2012

The Big Deal: Can private equity save the high street?

The Big Deal: Can private equity save the high street?

The high street has been savaged by economic turmoil. Yet the distressed buyout and private equity communities have been quietly rescuing ruined brands. Can they revive retail?

Buy when there is blood on the street. That pleasingly taut tenet, coined by the 18th Century nobleman Baron Rothschild, is as relevant in our fiscally austere world as it was then, in excess-all-areas Regency London.

For proof of this maxim, look at Britain’s once venerable high street, which can, if the aphorism is stretched a little, be likened to a toothless old prizefighter wheezing on the ropes. Our woebegone hero may barely be able to raise a glove in self defence but that doesn’t mean there aren’t deals to be done and profits to be made amid the mess and mayhem.

Take OpCapita, a buyout firm founded by British-American entrepreneur Henry Jackson, which decided to take a punt on the flagging Comet brand, purveyors of standard-issue electrical items. OpCapita stumped up the marvelously rounded sum of £2 (why not £1, one might ask, a more popular charge for distressed assets sales) to take the UK-based Comet stores off the hands of struggling Anglo-French retailer Kesa.

OpCapita, well-placed sources say, is also looking to strike more deals to buy failing or fading British high street brands. It is even mulling raising capital for a new fund designated solely to acquiring troubled retailers saddled with unworkable levels of debt, yet blessed with solid, workable brands.

Other buyout firms looking to snap up distressed high street brands include secondary investor Coller Capital, and Global Asset Capital (GA Capital), based in Palo Alto but with a big London office on the King’s Road.

Hilco, which finished its restructuring of home furnishings chain Habitat in 2011, is also on the search for operationally and financially distressed assets, as are R Capital (based in Mayfair), Better Capital (Charing Cross Road), and Meridian Equity (Finchley Road).

Of course, not all retail brands, as one private equity executive points out, are distressed. Far from it. Department stores, led by John Lewis, are doing very tidy business indeed, as are high-end retailers like Burberry and Barbour.

Several buyout funds are looking at integrated retail models – a mix of stores, catalogues and online sales. Other retailers are increasingly looking at the click-and-collect model that cuts rent bills, delivery costs and operational gearing.

In short, rather like running a catering business, there seems no one single model that’s a sure-fire winner. While struggling Blacks was sold to JD Sports for £20 million, YFM Equity Partners and 3i (the main owners of the Go Outdoors, one of Blacks’ leading rivals in the hiking-and-camping sector) is going great guns.

Or look at Kiddicare, the largely online childcare products specialist taken over last year by supermarket group Morrisons for £70 million. Kiddicare in January bought 10 out-of-town units once owned by the US electronics giant Best Buy, which utterly failed to crack the British market. Kiddicare is spending £15 million overhauling the stores, creating 700 jobs as it seeks to give its name and its chain a physical presence.

Profits indeed can be find in the most unlikely and bloodiest of markets. Fashion chain Bonmarche, part of the (also struggling) retailer Peacocks, has been bought by Sun European Partners, a deal led by the US buyout group’s London operations.

Around 225 of Bonmarche’s 390 stores are expected to remain open: KPMG and retail restructuring specialist GA Europe have been hired to manage the closures. Cardiff based Peacocks, which collapsed in January with debts of £750 million, is itself being sized up by several buyout firms including KKR, Permira, Cinven, and Solstra Capital Partners.

And in Ireland, an economy clawing its way back from virtual bankruptcy, the retail sector is showing flickering signs of life. In February, Hilco sold its stake in Irish retail chain A-wear for £20 million to Flacks Group, a firm that specialises in distressed retail and property assets, securing 460 jobs at the chain’s 32 outlets.

Of course, for every (often partial) silver linings, there are dozens of sow’s ears. There are literally too many shops and brands on Britain’s austerity-era high streets. Research firm Verdict reckons that 44,000 specialist retailers have closed in the UK over the past decade, and more names – big ones, former mainstays over every weekend shopping trip – are likely to follow them to the great garbage pile in the sky.

This lumpen clump could include struggling brands like Mothercare, HMV, and chocolatier Thorntons, all struggling to reduce debt piles and close stores to cut costs. Look also to other weary, dog-eared brands like Clinton Cards, videogame retailer Game Group, or low-end fashion names such as Primark, Peacocks and Matalan.

Even New Look, a chain that redefined the phrase ‘aggressive growth strategy’ in the pre-crunch years, and which remains hugely popular, is bowed down by debts of nearly £700 million.

Britain’s retailers, then, are still acclimatising to a world where nothing is certain, and debt, once viewed approvingly as being symptomatic of bold, risk-taking management, is the dirtiest of four-letter words. Yet as Baron Rothschild would have noted approvingly, the sluices are open, the blood-red ink is flowing free.

It may be the worst of times for some, but for the boldest and most liquid members of London’s distressed buyout community, these could just turn out to be the very best times of all.

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