Debenhams goes shopping for investors

UK retailer Debenhams launched bookbuilding for its IPO last week, but declined to involve retail investors. The deal sees the company raising £700m of new money to pay down its current debt of £1.9bn, while its venture capital backers are selling stock worth up to £337m, to give a total deal size of just over £1bn, pre-shoe. Management may also sell up to 30% of its shares in the deal.

The deal will mark the largest test of the European IPO market so far this year, and the lack of retail means there will be no boost from this investor base to push the book along. Nevertheless, the company is a familiar name to most accounts, it being just over two years since Debenhams was taken private by TPG, CVC Capital and Merrill Lynch.

As with the recent return to the public market of French electrical company Legrand, the question for investors is how much has changed in the interim. Debenhams has seen sales increase by 15% and its market share move from 15.2% to 18.6%, although much of this has been achieved through the opening of 20 new department stores.

It has also been able to increase its Ebitda margin from 12% to 15.8%, but some investors are still to be convinced that the company will be able to achieve the growth necessary to match the valuation placed on the firm. A particular concern is that the UK high street has struggled for some time and like-for-like sales at Debenhams have been weak. The 26 weeks to March 2006 saw like-for-like sales growth of just 0.6%. This has since improved to around 1.7%, but is still a long way down from the same period one year before, when growth was 4.2%.

Bookbuilding for the IPO began last Thursday and continues until pricing and allocations on May 4. The price range of 195p–250p will give the company a market capitalisation of £1.8bn if pricing comes in the middle of the range, and gives an enterprise value of £3bn, once debt has been paid down.

The price range puts the company on a 2006 P/E multiple of 12.8x–14.9x. The bottom of the range is in line with Next, which trades at 12.6x, while the top offers a discount to Marks & Spencer, which trades at 17x. The leads have gone through extensive pilot fishing and pre-marketing to ensure the valuation is in line with what the market will pay, and it is worth noting that the multiple implied by the top of the range is where the company was taken out in 2003.

Net debt will be 3.3x Ebitda following the float, but the leads said the company would still be able to finance a payout ratio of 50% to give a yield of 3.5%. Citigroup and Merrill Lynch are global co-ordinators of the offer and joint bookrunners with Credit Suisse and Morgan Stanley.

The lack of a retail offer was to allow for more flexibility in both the timetable and documentation and because of the cost of maintaining a retail shareholder base. It was also conceded that retail was not expected to be keen on the sector. One observer pointed to the lack of impact that retail investors had had on the IPO of defence research company QinetiQ in February and how unhelpful their selling had been to the aftermarket.