“You gotta pay to play” is probably an overused phrase among buyout pros, but in a market where the cost of going after a transaction can seemingly rival the enterprise values of the companies being pursued, the cliche is fitting.
That’s part of what makes the GBP1.7 billion deal ($3.1 billion) for English retailer Debenhams unique. Acquirors Texas Pacific Group and CVC Capital Partners turned the tables on the conventional auction by persuading the seller to “go Dutch” on the sale when they negotiated an EURO8.5 million inducement fee for joining the bidding.
On its face, that kind of fee sounds absurd, especially when competition for deals is so fierce. But in this case, TPG and CVC knew Debenhams was in a bind. The company had rushed to the altar with a Permira-led buyout team, called Laragrove, but when shareholders voiced displeasure in the management-backed GBP1.54 billion buyout, at 425 pence per share, the company was left with just one suitor and no impetus for the buyer to move its offer up the scale.
“Before we entered the process, there was little incentive for Permira to revise its price, even though some institutional shareholders were expressing concerns,” TPG Partner Philippe Costeletos tells Buyouts. “But given how far ahead the competitors were in the process, we couldn’t justify going out of pocket with the diligence costs, so we asked to be compensated for it. This wasn’t something that had been done before, but we felt it was the only way to move forward. As a result, the advisors were able to add some competitive tension to the sales process and ultimately a much higher price for shareholders.”
At the Dance…
With its foot placed firmly in the door, TPG and CVC went on the offensive to acquire Debenhams, and proved in the end to be much more than just a bidding dummy used to boost the Permira bid. The first move demonstrating the firms were in it to win came when the investor group, dubbed Baroness Retail, teamed up with the management team of Rob Templeman, Chris Woodhouse and John Lovering. For Permira, this pairing must have felt like seeing their ex at the prom with the captain of the football team. Just two years ago, Permira had teamed up with the same management group to acquire Homebase, an investment that returned six times its equity for the European buyout group.
The trio came to Baroness from CVC-owned Halfords, where they were in the glow of yet another retail turnaround. The management group’s history of success was, in the end, the stimulus that spurred the buying group to outbid Laragrove. “For us to really gain conviction in this deal, we just referred back to the [management’s] track record of success,” Costeletos says. “We were working on a different plan [than Permira]. If we didn’t have our own strong management team and investment thesis, wouldn’t have bid.”
And with its thesis in place, Baroness went ahead and trumped Permira’s opening bid with a per share offer of 455 pence, valuing the company at GBP1.6 billion. At this stage, TPG’s and CVC’s ability to move quickly paid dividends. By most accounts, their offer took both Permira and Debenhams by surprise, and ultimately allowed the consortium to hit its stride just as Laragrove started stumbling.
After starting the Debenhams negotiations well behind the competition, Texas Pacific Group and CVC rallied to even up the count with Permira, and to finish the firm off, used the private equity equivalent of a pitcher’s high heat’ to get the win.
After Baroness put in the 455 pence bid, there was dissention in the Laragrove camp about just how high they could go. Goldman Sachs began showing cold feet, and was ready to walk. At this point, Baroness further strengthened its team and recruited Merrill Lynch Private Equity to join the investor group.
And the fortified Baroness ensured that the process would not drag on, quickly upping its offer to 475 pence per share. Costeletos described the decision, saying, “We knew we had to move fast. We were starting to hear that Permira was trying to get more banks on board to put in a higher offer. It’s not easy to submit a bid over your own, but we felt their consortium was starting to waver, and we went in with the new bid when we felt we had the best advantage.”
This new bid proved to be the difference, sending the Laragrove team into a funk, and ultimately served as the last strike for Permira.
“In the end, we were able to pay a fair price, with a management team that gives this transaction a very good risk/reward.”