U.K. Retailers Cast Off Five-Year IPO Lull as Outlook Brightens
U.K. retailers are poised to raise more from initial public offerings in the first quarter of 2014 than in the previous five years combined as a strengthening economy whets investor appetite for the industry.
Companies from discount chain Poundland Group Plc to online appliances seller AO.com will glean at least $1.4 billion from selling shares in the next few weeks, according to estimates from Ernst & Young Global Ltd. and researcher Dealogic. That compares with about $433 million raised by British merchants in the five years through 2013, data compiled by Bloomberg show.
Pets at Home yesterday became the fourth U.K. retailer this year to begin an IPO process, riding the coattails of a buoyant European market that saw IPO volume more than double to about $38 billion in 2013. Economic conditions are also becoming more favorable, with U.K. consumer confidence at its highest since 2007. That’s providing an exit opportunity for buyout firms that have owned retailing assets since around the recession of 2008.
“It’s a good time for IPOs in general at the moment because there’s plenty of money flowing back into equity markets,” said George Godber, who helps manage 3 billion pounds ($5 billion) at Miton Group Plc in London and invested in the 2013 IPOs of Conviviality Retail Plc (CVR) and Bonmarche Holdings Plc. (BON)
Pets at Home, the 369-store chain that’s mainly owned by private-equity company KKR & Co., said it intends to raise about 275 million pounds in an IPO. The announcement came a day after Poundland, the operator of more than 500 discount stores, confirmed its intention to list.
McColl’s Retail Group Ltd., an owner of 1,276 convenience stores and newsagents, began the rash of possible retail IPOs in January when it announced plans to join the stock market this month. The owner of AO.com said Feb. 7 that the online retailer intends to raise about 60 million pounds in an initial offering.
Department-store company House of Fraser last month ended talks to be acquired in favor of an IPO, people familiar with the matter said. DFS Furniture, clothing chain Fat Face and discounter B&M Retail are among those that media reports have suggested are also considering listings.
London has also attracted Lenta Ltd., the Russian hypermarket chain controlled by U.S. buyout firm TPG Capital, which is seeking to sell as much as $1.26 billion of shares.
The rush has been partly fuelled by the strength of general retail stocks in London. Buoyed by accelerating retail sales growth and falling unemployment, the FTSE 350 General Retailers Index has gained 39 percent in the past year, compared with a 0.2 percent drop in the equivalent food retail indicator and a 6.6 percent advance in the benchmark FTSE 100 Index.
“The strength of the U.K. economic recovery makes exposure to U.K. consumers an attractive prospect,” said Manuel Esteve, head of equity syndicate for Europe, the Middle East and Africa at JPMorgan Chase & Co.
Poundland said Feb. 18 it sees “significant opportunities” for growth, with potential for more than 1,000 stores in the U.K., compared with about 500 now.
With investors seemingly spoiled for choice, retailers will need to avoid excessive valuations and being saddled with too much debt, according to Richard Marwood, a senior fund manager at Axa Investment Managers Ltd. in London.
“With PE, there is often a risk that there is not a lot of upside to the businesses they sell,” said Marwood, who helps manage 700 billion pounds in assets. “Low-margin businesses, such as retailers or those whose trading can be volatile, can be destabilized by too much debt.”
Pets at Home will use the IPO proceeds and 325 million pounds of new bank facilities to cut borrowings, which it said will give it a ratio of net debt to earnings before interest, taxes, depreciation and amortization of about 2.5 times at the time of admission. That compares with an average of 0.52 times for companies in the FTSE 350 General Retailers Index.
“Pets is a great business, but it will be seen as an important test of investor appetite for private-equity owned retailers,” said Nick Bubb, an independent analyst in London who has covered the retail industry for more than 30 years. “The question is how much has been left in the tank by KKR?”
Private-equity firms typically pool money from pension plans and endowments for a 10-year term, buying companies in the first five years and selling them in the next five.
Only about 10 percent of the companies in the retail IPO pipeline will probably make it to the stock market with some likely to be bought instead, according to Maria Pinelli, global vice chairwoman of strategic growth markets at Ernst & Young.
“Many of these sales are being run as dual-track processes and we know there’s pent-up demand for M&A as well, so some of them could go that route,” Pinelli said.
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