The story of Debenhams’ move into private hands and its return to the London Stock Exchange in just three years is one of barefaced opportunism, great timing and good management. It is also a story of how one firm’s relationship with a private equity client brought it work worth more than £6bn over just three years.
Debenhams launched a £1.7bn IPO last week just three years after private equity consortium Baroness Retail, which included CVC Capital Partners, Texas Pacific Group and Merrill Lynch Global Private Equity, acq-uired the retailer in a £1.74bn leveraged buyout (LBO).
The LBO has proved to be one of the most successful of recent times. It is understood that all three members of the consortium have already made back more than the £600m they each contributed, leaving the proceeds from the IPO (despite being priced on the lower end of the price range) to go straight into the column marked ‘profit’.
At the time of the auction, the then Ashurst Morris Crisp, led by partner Richard Gubbins, was advising Debenhams on the bidding war. The firm had been the retailer’s regular legal adviser for the previous five years, since its demerger from the Burton Group in 1998. A relationship that was soon about to end.
Baroness was not even considered a bidder for Debenhams at the start. Back in 2003 a private equity consortium led by Permira, advised by Clifford Chance‘s Matthew Layton, had been in talks with the retailer and many thought the deal had been sewn up.
Baroness not only muscled its way into the deal but also got Debenhams to pay for the privilege through inducement fees.
Edward Braham, the Freshfields Bruckhaus Deringer corporate partner who advised Baroness, says: “We told [Debenhams] we weren’t prepared to do the rest of the work unless they covered the cost.”
As The Lawyer reported at the time, Baroness earned £1m per week to conduct due diligence on Debenhams. Looking back the cost seems justified, as Debenhams shareholders saw the bid for the company rise from £1.5bn to the £1.74bn that the Baroness consortium eventually paid.
The price was all the more significant considering that, back in 2003, retail was generally down in the dumps and LBOs in the retail sector had been few and far between.
As one acquisition finance partner at a US firm put it: “They went against the market sentiment. It was a pretty gutsy LBO.”
However, once CVC and Texas Capital got their hands on Debenhams, they had to turn it around. The high price they paid for the retailer meant there was very little room for manoeuvre. But the management team in charge of Debenhams – Rob Templeman, Chris Woodhouse, Michael Sharp and John Lovering – was the same that turned around both Homebase and Halfords.
The sale also all but ended the relationship between Ashurst and Debenhams, with Freshfields moving into the role of lead counsel.
Meanwhile, the consortium had to get on with the financing and eventual refinancing of the deal.
The original Baroness financing package included a senior facility with a mezzanine bridge funded by a high-yield bond.
Shearman & Sterling partners Clifford Atkins, Anthony Ward and Iain Goalen advised the bank consortium of Credit Suisse, Merrill Lynch, Morgan Stanley and Citigroup.
Brian Gray, the Freshfields partner who advised the management team on the deal financing, says the use of a high-yield bond gave Baroness more room to up its bid for Debenhams than the Permira-led consortium, which had opted for a mezzanine component in its funding proposal.
“The high-yield market was more liquid than the market for mezzanine debt. It had a deeper investor pool, meaning you could raise more,” explains Gray. Debenhams eventually raised £325m from its high-yield offering, having originally planned to raise just £275m.
The refinancing, which took place in early 2005, consisted of a syndicated loan, which included a second lien component.
Gray argues that the timing of the syndicated loan was spot on. “They hit the market with perfect timing to get as much from the debt as they could,” he relates.
At the time, it was expected that Debenhams would re-enter the stock market in the near future, so the documentation included sophisticated qualified public offering provisions.
In March 2005 Debenhams also completed a sale-and-leaseback with British Land of 23 freehold and long leasehold Debenhams stores. SJ Berwin corporate partner Michael Goldberg led the team advising British Land, while Freshfields brought in partners David Ereira and Patrick Gaynor to act for Debenhams.
The new management team had already separated the real estate assets from the operating company, so all profits from the £495m deal could be added to the spon-sors’ internal rate of return (IRR), although it is believed that some of the proceeds were used to repay the debt.
One year later and Debenhams is back in public hands. As reported by The Lawyer (6 February), Freshfields secured a plum role on the float.
There was also time to get in one more refinancing of the business. Ever the opportunists, the Debenhams team realised that as a FTSE250 company they could reach a different investor base and secure better funding levels from the banks.
Gray was once again brought in to advise on plans to raise around £1.35bn through a senior debt issue. The proceeds were intended to refinance the existing package, including repaying the second lien early.
“Even allowing for the fact we have to repay the second lien, the costs Debenhams will save per year still make it worthwhile,” explains Gray.
Allen & Overy got its first Debenhams-related role when partner Trevor Borthwick advised a bank syndicate made up of Barclays Capital, Lloyds TSB, HBOS and the Royal Bank of Scotland.
The float has also brought Ashurst back into the fold: it won a mandate to advise the underwriters.
Debenhams’ evolution is a textbook example of how good timing and strong management can enable private equity-owned businesses to move into public hands successfully. No wonder the lawyers love it.