There’s a simple reason why private equity fancies a bite of Asda

Linda J. Dodson

This is the kind of thing that can make the dollar signs flash in the eyes of private equity executives. They start doing complicated sums based on whether those freeholds could be used as collateral for loans or sold off and then leased back to the company. 

Private equity gets a bad press. But really there are two types of private equity investment. These investors can take badly run businesses, restructure them away from the glare of public markets and turn their fortunes around or they can snap up perfectly good businesses, load them up with debt and break them down for parts. In other words they can add value through better management or they can extract value through so-called “financial engineering”. 

Of course, we don’t yet know what Apollo’s plans are for Asda. But we can look for clues. One of these might lie in the fact that it has appointed Rob Templeman to advise on its bid. Templeman was the man who ran Debenhams during the years when it was owned by private equity firms.  

This is going back a bit. To refresh your memories, Templeman and his private equity backers won a long battle to buy Debenhams in 2003 and then re-listed it on the stock market in 2006.

This worked out very well for the private equity investors – CVC Capital Partners, TPG Capital and Merrill Lynch Private Equity – who tripled their £600m investment. It didn’t work out so well for Debenhams, which issued three profit warnings in the 12 months after it refloated. That, unfortunately, was only the start of a long, sad decline. In April this year, Debenhams fell into administration for the second time in a year. 

Not all of Debenhams’ woes can be placed at the door of the private equity companies that owned it for just three years in the 2000s. But it certainly didn’t help. Many of their attempts to increase efficiency actually ended up severely hampering a business that was, up to that point, a mainstay of the British high street.

This included raising £1.1bn of debt to pay for Debenhams and then quickly shifting it on to the retailer’s balance sheet. The owners then refinanced those loans with bonds and took the opportunity to pay themselves a £130m dividend after just a few months.

Then they doubled the amount of time Debenhams took to pay suppliers, turning them into unsuspecting creditors, and cut costs. That meant the stores, in which it is holding almost constant sales, started to look increasingly tired. 

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