New Look-ing Good for PE Backers

UK fashion retailer New Look beat the high street gloom, posting underlying UK sales growth of 2.8% in the 14 weeks to January 3.

The results will be welcomed by New Look’s private equity owners Apax and Permira which have owned the retailer alongside its founder Tom Singh since 2004.

New look’s sales growth was accompanied by an increase of 170 basis points in its gross margins, both figures contrasting with rival retailers Next and Debenhams.

Although New Look’s executive chairman Phil Wrigley cautioned that in 2009 the market would become “more difficult”, the resilience shown by the retailer in the face of the deteriorating consumer climate may make it an attractive acquisition target for another private equity firm brave enough to invest in retail in the current environment.

Apax and Permira’s ownership of New Look is approaching the five year point. How much longer will they want to hold the business? Taking it to the next stage of development, it is due to open its first store in Moscow this year, may be a task better suited to a new backer.

The vendors would certainly not get the £1.8bn-£2bn they were reported to be targeting in May 2007 but a revised sale price could still deliver a healthy return given that the pair have already successfully recapitalised the business twice, in 2005 and 2006.

Undoubtedly a buyer would find raising the finance for a potentially £1bn+ deal extremely difficult but a lot of firms are sitting on huge warchests. A deal could be struck should some of the current lenders agree to continue lending to what has been a very good credit perhaps combined with a vendor loan note.

Ultimately the lack of debt financing may be so severe as to convince the vendors of the benefit of holding onto New Look until the credit markets return. However, the fact remains that for a big buyout player which hasn’t got a deal away for sometime New Look is a well-run asset with good growth prospects.