Private equity deals

Why are we talking about this?

After the acquisition frenzy of the noughties, recession brought to an end the welter of retail deals that set the sector alight. But last week private equity firm KKR bought Pets at Home for £955m.

The valuation prompted speculation that a flood of cash may once again be poured into retail.

Is Pets at Home a one-off?

No. Potential buyers including Advent International and TPG are circling Matalan - founder John Hargreaves hopes their keen appetite might bring in as much as £1.5bn. Similarly, the management of HobbyCraft is interested in buying the business from its family founder.

Of course, any acquisition needs a willing seller and the signs are that owners are increasingly confident they can realise value. In the US, Dollar General - also backed by KKR - successfully listed last year. On this side of the pond, New Look’s private equity investors - Apax and Permira this week confirmed their desire to realise some of their investment via an IPO. DFS, the sofas giant created by Lord Kirkham, is also examining options including a float.

What will determine whether more deals go ahead?

In the end, whether private equity funds are buying or selling, it’s all about satisfactory valuations being achieved. And valuations depend on a convincing business story.

Take Pets at Home: it has 250 shops, but it has always said there is potential for 400. As it heads for that target, its continued success and growth has depended - and will depend - on business acumen. In retail, opportunities and achievements in operational improvement by more effective sourcing, buying, merchandising or other core disciplines will all be key determinants of whether deals are goers. Similarly, the involvement of respected management is seen as an essential requirement.

More broadly, the financing climate will have a key influence.

So will there be more retail deals?

One private equity source maintains that the Pets at Home deal reveals nothing about attitudes to retail, but instead indicates deals will be decided by quality of business asset rather than by sector. The message is there will always be interest in strong retail businesses, but not necessarily strong interest in retail per se.

The other lesson from Pets at Home, which considered a stock market listing in tandem with a sale, is that when the business case is convincing, private equity may be willing to put a higher valuation on a company than would the public market, which is often susceptible to shorter term considerations.