Debenhams is a large British department store chain sometimes known as “Debtenhams” for obvious reasons. The chain was christened that by the Financial Times in a commentary this week after there was a “run” on the stock, driving the shares down on rumours of trading problems and possible collapse. And there are worrying signs here for some high profile companies.
The company brought forward a trading update from 3 July to last Tuesday to quell the fears. It worked. Momentarily. The shares rose, then eased as the figures showed a small rise in sales, but no mention of whether it’s earning profits or is in losses.
But the real message from Debtenham’s problems is what it means for all those private equity floats and their buyouts in the next couple of years. These refloats and payoff deals are going to be very tough to do. Private equity firms will own many of these companies for longer than originally planned. And it’s going to be very tough to flip these buyouts back to the very people who owned them in the first place at a nice profit: debt is out, leverage is a dirty word and investors want the private equity owners to share some of the pain by taking lower price and therefore profits before they get interested.
Debtenhams is Britain’s third largest department store, but since being brought to market by its private equity owner, the TPG group of Texas — which controls Myer in Australia — it has struggled to perform. And it’s got nothing to do with the downturn in Britain. The retailer was refloated in 2006, so it had a year or more to show that the private equity experience had made it a better business. It hasn’t. Sales growth has been average and earnings are under pressure.
So once the market turned with the credit crunch, it was exposed. Doubly so, given the UK economy has been harder hit than any other economy, even the US. One British bank has been rescued and nationalised, another is being bailed out (by TPG co-incidentally) and three other major banks have raised more than $A40 billion in new capital in the past two months to stay afloat.
Sliding retail sales, falling housing deals and rising credit card bad debts mean tough times for all British retailers, not just Debenhams. But when there’s a mountain of debt, that’s a red flag to nervy investors.
Debenham’s experience is part of the new rules for stockmarkets around the world. If you look at the treatment handed out here to companies with high debt, it’s instructive. Risk is out, sentiment is suspicious and the years of the easy money which enabled private equity buyouts and then flips back to the market at huge profits, are over. Debt now has a high and rising cost, based on credit and liquidity risk.
It is something TPG will find if it tries to bring Myer to market next year, as the original plan suggested. Its what CVC will find when it tries to refinance and list PBL Media, and when KKR wants out of the Seven Network, not to mention the many other buyouts that now carry high debt. Investors in these deals will be hurt as it will no longer be possible to refinance them before the float to give the investors a final killing.
Wasn’t Coles Group lucky to avoid being taken over by the likes of KKR, CVC, TPG and Carlyle, all of whom were sniffing around?