KPMG / SPSL Retail Think Tank – White Paper #4 April/May ... - Hays

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The final reason for the private equity interest identified by RTT Members is the very fact thatretailers are numerous, high profile, excitingly ‘rich’ targets and can be readily assessed bynot only looking at their published results but also by simply walking down any high street.So is PE’s attraction to retail a function of the potential to behad in productivity gains?The RTT believes not in strict sense of labour-based productivity, but certainly once they havesuccessfully identified, targeted and acquired a retailer, PE firms look to change threeelements of that business as soon as possible. Helen Dickinson of <strong>KPMG</strong> calls this “sweatingthe assets”.Element “Number One” relates to changing the financial structures, for example, thecompany’s leverage. A lot of what PE houses do impacts cash flow much more thanprofitability because after the cash flow becomes more generative, they can decrease theleverage. They’re less concerned by margin, therefore, than in keeping the mill turning. Inother words, in the private arena, the focus is on cash flow whereas in the public market thereis far greater attention given to profit.Publicly quoted retailers have other concerns too. For instance, if a management teamdisposes of some assets, say by selling freeholds and concluding lease-back deals, theinstant cash-flow boost will look good on the books for one quarter or one half-year but maymake future trading look very lacklustre, opening up management to criticism. PE firms haveno such qualms. If they decide to get instant results, a broad based programme of disposal,rationalisation, improvement and optimisation is exactly what they will do from day one. Withno public shareholders, as such, they are well placed to do it. As Helen Dickinson noted; “It’sthe difference between profits and cash. It’s that simple. There is far more focus on short termprofit in the public arena. Far more on cash flow in the private.”Vicky Redwood of Capital Economics agreed: “Like for likes are more important than cashflow in the public arena. In the private equity context there are no quarterly like for likes toanalyse and sweat over; just cash and the growth potential. VC houses don’t generallyinterfere in management in one sense, but in another sense are even more challenging thanthe City.”Element “Number Two” takes up that point and centres on management excellence and itsability to improve the business’s efficiencies. Paul Clarke noted that “PE houses interested inretail know a lot about each company even before they attempt a takeover. They analyse thecompany at least ten times more than the company’s own management team, so will often6
know more about the company that its own management. That’s not a bad thing and certainlyhelps them guide the management when they acquire it.”The new owners will quickly seek to deconstruct and reconfigure every element that can besubjected to efficiency improvements, from sourcing through to marketing, staffing through tosuppliers. Under PE control retailers will certainly put pressure on suppliers. If suppliers arecurrently paid 30 days in arrears, the new owners will demand 60; if 60 they’ll demand 90.“The Baugur model is particularly interesting”, commented Tim Denison. “It looks to make asignificant rationalisation in the cost arena by building and sharing a back end, ‘big box’solution amongst its retailers, which spans their back office IT platform, e-commerceoperations and HR functions.”Admittedly many of these are things that quoted companies can do too, but their managerstend to be more cautious, more risk averse. Store management teams answering to the Cityand market investors more often than not believe that the short term perspective taken by themarket constrains them from taking anything but iterative management decisions. There islittle doubt that the market drives the current management of publicly quoted companies and itthus often may not be in a position to take the actions to accelerate the performance stepchanges that a PE house can and will.However, Paul Clarke pointed out that Stuart Rose, a man who has successfully resurrectedone trader’s profitability while it’s still a quoted company is neither averse to demanding moreof suppliers, nor making bold step-change decisions; “This is not just any chief exec, this isthe M&S chief exec”, he noted. Nick Bubb of Pali International agreed that the managementconstraints on public companies should not be overplayed; “Tesco, although not a PEacquiredfirm, has shown how well it is able to constantly improve the efficiency of retailingand never seems to question how far efficiency gains can be made.”Vicky Redwood speculated that PE firms might, by their very presence, encourage publicretailers to up their game, leveraging-up to put off PE takeovers and thus consciouslyremoving some of their nascent tax advantages. Nick Bubb agreed, citing Topps Tiles whichis now, he said; “highly geared in order to see off predators - and this in a market where grossmargins are on average a whopping 62%.”Element “Number Three” involves focusing on establishing the seed bed to foster valueadded output <strong>–</strong> the means to accelerate the delivery of sales growth, as a businessimperative. Invariably this involves investment, whether it is to roll out a store chain nationally,build a brand’s profile, or extend the reach in other ways such as on-line, licensing, spin-offs,new lines etc.7
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KPMG / SPSL Retail Think Tank – White Paper #4 April/May ... - Hays

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