Magazine article Marketing

Helen Dickinson on Retail: Private Equity Players Need Real Buyout Vision

Magazine article Marketing

Helen Dickinson on Retail: Private Equity Players Need Real Buyout Vision

Article excerpt

There is no doubt that the retail sector has got off to an explosive start this year. We are only in February and already corporate activity continues apace as both Woolworths and Somerfield find themselves the targets of private equity players looking to take them private.

Such has been the activity from the private equity industry that we at KPMG decided to take a closer look, and had a journalist interview retailers and a couple of bankers that supply private equity investors with debt funding (an essential component of any buyout). The report makes for very interesting reading.

While we all know that private equity houses are investing in listed retailers because they believe them to be undervalued, what is not so well known is whether these privately owned 'buyout' companies are managed differently in order that their true value can be realised by their acquirers.

It is true that irrespective of ownership structure the fundamentals in a retail business remain the same - getting the right product, in the right place, at the right price - but the way management achieves its objectives differs in the public and private world.

While a quoted retailer is managed on a profit-centric basis - with its key aim of achieving the like-for-likes sales and earnings growth that City investors demand - a buyout's focus is on 'managing-for-cash' to ensure it can pay down the debt it has taken on.

This involves disciplines such as identifying operational inefficiencies, marking down slow-moving stock, undertaking sale-and-leaseback deals on freehold properties and introducing rigid return-on-investment hurdles on capital expenditure.

While various parties have suggested that some buyouts have been done at too high a price and that these businesses have burdened themselves with too much debt, our interviewees strongly dispelled any such suggestions. They argued instead that, regardless of the debt, they could ride out any economic downturn, and that having the wrong products on the shelves for a season was a far bigger issue for them.

For smaller, fleet-of-foot retailers, such stock issues can soon be corrected because they are able to change their product lines swiftly. Since they operate privately they can be much more aggressive with mark-downs compared with a quoted retailer, which would be concerned about the impact of such a decision on its future profit levels. …

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