Debenhams’ life in the hands of private equity has been a short but interesting one and a text-book case of how a company can be financially re-engineered. The retailer was taken private by CVC, Texas Pacific and Merrill Lynch in 2003 for £1.7 billion. The company then had debts of £128m and made annual profits of £168m. In the intervening period Rob Templeman, Debenhams’s chief executive and a very talented retailer, has transformed it, but even Templeman is not Merlin.
There is a price to this engineering and it is called piling on £1.9 billion of debt. The company itself has been split into an operating and property company. In doing so, the backers have taken out £1.3 billion against an original investment of £600m. The net effect is the company is now paying a big interest and rental bill against a backdrop where operational costs are rising.
Nothing wrong with that. The private-equity boys are experts at making companies more efficient and the firm now has one of the longest supplier-payment terms in the business, which can sometimes flatter its cash position.
And why does it need to float? The main reasons are to crystallise a bumper share package for the top directors and repay a big slug of senior debt. This proposed float does little to dampen criticism that private equity sometimes uses the stock market as a refuse centre.
When you phone up Debenhams and ask about the £3 billion figure, the company says it didn’t put the number into the market. It says it is only just starting to talk to bankers about its options. A float seems the likeliest outcome — the retailer can hardly refinance again.
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Debenhams is not doing itself any favours leaving the figure uncorrected. For the year just ended it made sales of £2 billion and pre-tax profits of £238m. Templeman and his team have done a great job, but in the current financial year when the refinancing and rental repayments kick in I wouldn’t be surprised if profits are half those reported last time. The £3 billion is for the fairies — £1 billion is more like it.
V for Victor
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LLOYDS TSB’s long hunt for a chairman looks like it is coming to an end, and it has got the right man. Like most City grandees, Sir Victor Blank has his share of critics, but he undoubtedly brings unrivalled experience and a strong track record to the bank at a critical juncture in its history.
While he is best known for his time at the top of GUS and Trinity Mirror — chairmanships we now assume he will relinquish — Blank actually cut his teeth as a corporate lawyer, joining Clifford Turner (now Clifford Chance) from Oxford. He followed the well-worn path from law into investment banking, and rose to become chairman of Charterhouse.
And — just in case his new colleagues think he might be a bit of a novice at the retail side of the banking game — he was a director of Royal Bank of Scotland for eight years.
But it was his role at GUS that probably clinched the job. In 2000, when Blank became chairman, nobody was really sure what awaited the retail group. It appeared to be nothing more than a ragbag of underperforming assets, such as Burberry, whose best days looked to be behind them.
But Blank recruited the right executives and let them get on with it, and the results have been worthwhile. Five years ago the shares were languishing around 440p — they closed on Friday at 990p.
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Blank’s departure from GUS is likely to hasten a further split — Argos, the catalogue shopping company, will probably be sold to another retail group, while Experian, which provides credit information, will remain a quoted company.
Blank must now reinvigorate Lloyds, which has seemed to have the least momentum of all the high-street banks in recent years.
Analysts regularly rank it as a takeover target, and fault its lack of growth prospects. Blank needs to find a way out of the slump.
His relationship with chief executive Eric Daniels will be crucial. Bid speculation has never been far away from Lloyds and most analysts believe it will eventually tie up with a partner on the Continent.
Blank’s arrival will ensure that the interests of investors will be well protected. The departing chairman, Maarten van den Bergh, has done a steady job, but he has not energised the bank as much as investors had wished.
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Changes afoot
WHEN Andrew Gowers left as editor of the Financial Times, everyone wanted to know where his next job in a newspaper would be. The answer is, he has chosen to join us as a weekly columnist.
Gowers. who is also heading a government review of intellectual-property rights in Britain for Gordon Brown, the chancellor, is one of the City’s most experienced business journalists and his many roles during 23 years at the Pink ’Un included setting up FT Deutschland.
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Each week he will share his incisive thoughts with us, starting with an acerbic look at Davos.
Gowers’ arrival is one of a number of changes at the paper. We are joined by Tracey Boles, who will cover energy and utilities. We are also bringing back a letters page, which will be sited below Gowers’ column. Letters should be sent to businessletters@sunday-times.co.uk.
A new internet facility to enable readers to have an online debate with our writers and columnists is being introduced. It starts this week with Richard Fletcher’s article on the business impact of our increasing obsession with food. You can log on at www.timesonline.co.uk/backchat and tell us what you think.
And finally the judges. For the past two years Tim Steer of New Star Asset Management and Andy Brough of Schroders have provided an invaluable insight into how fund managers pass judgment on quoted companies. During that time they have covered a vast swath of the FTSE 250.
Steer and Brough remain an invaluable part of this section’s weaponry and they will still make guest appearances and pass judgment on flotations and rights issues. This new series is expected to start with Qinetiq.