The £117.4m sale of Jane Norman to Baugur and Kaupthing made Graphite Capital a 2.9x return on its January 2003 investment when it backed a £70m buyout led by chief executive Saj Shah. At that time, the UK women’s fashion retailer had 46 high street outlets comprising 21 concessions, mainly in Debenhams, and 25 stand-alone stores across the UK. Now it has 39 stand-alone stores and 56 concessions, and annual sales have grown over the past five years by 230% and operating profits by 250%.
Graphite made its investment through the 1999 fund Graphite Capital V, which is fully invested, and the evergreen Graphite Enterprise Trust. The healthy return, an IRR of over 50%, came as a pleasant surprise for the firm, which held an 80% stake in the business (management held and continues to hold 20%). Andy Gray, partner at the firm, says: “While it’s hard to say anything other than the retail market is tougher that it has been, some businesses are doing quite well. With Jane Norman, the like for like sales were holding up, which we were a little bit surprised about. Jane Norman has a young female consumer base and they are still spending.” Over the last six months, underlying sales rose by 7%, and in the year to March 2005, Jane Norman reported sales of £70.7m and EBITDA of £14.3m.
Gray says of the thinking behind originally buying the company: “The business was being sold at a very attractive price and Saj Shah was an exceptionally experienced chief executive with expertise across all key areas of the fast growing company. Graphite saw the potential to strengthen the management and develop this business, which was generating strong sales from a small base of sales, and we believed that the concept was suitable for national roll-out.”
It’s been a busy year for Graphite. Over the last 12 months the firm has completed 12 exits and refinancings with a total valuation of around £800m. These have included Maplin Electronics at 9.5x cost, Ridgmont at 6.4x cost, Wagamama at 10.2x cost and LS Group at 6.1x cost, all except for Wagamama were invested in both the 1999 Graphite Capital V and the evergreen Enterprise Trust funds.
The decision to sell Jane Norman was made at the start of the year. Gray says: “It is a very successful business with great prospects. Since the MBO, we have strengthened the management team and helped the company grow the business. It is now at a step change in its growth and this is a good time for a new investor to step in. At the same time, the sale of the business cements an attractive return for investors.”
As with all exits, an IPO was considered, but the firm followed the advice of its corporate finance advisers who felt that a private transaction was preferable given current conditions in the stock market. Graphite received interest from a number of potential bidders, but it was felt Baugur and Kaupthing were best placed to support Jane Norman’s management team develop the business through its next stage of growth.
Kaupthing is an Icelandic bank that has backed a number of Baugur investments in the UK. It underwrote senior and mezzanine debt financing to support the acquisition, as well as investing from its new private equity fund, Kaupthing Principal Investments. Baugur and Kaupthing hold stakes of about 40% each.
Baugur has been especially busy over the last few years and now owns a number of the UK’s best known retailers, such as Iceland, Oasis, Karen Millen, Coast and Whistles, Hamleys, Goldsmiths jewellers and MK One fashion. It has ambitious expansion plans for its latest acquisition, with the opening of 70 new outlets and foreign expansion in the next three to four years high on the agenda.
The acquisition rounds off a difficult month for Baugur, which withdrew from the consortium bidding for UK supermarket Somerfield after Jon Asgeir Johannesson, Baugur’s chief executive, and five other executives, were charged with fraud. They all deny the charges.