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Homebase: shareholders reap rewards

Homebase has delivered an impressive return for its investors at a time when many are struggling to find buyers for their businesses. GUS, which owns the Argos retail chain, has acquired the business for around GBP900 million. Homebase was originally hoping for an IPO, which might have valued the business at some GBP1 billion. While Permira has declined to comment on the exact amount made on the deal, it is rumoured to be a profit in the region of GBP400 million.

The deal should also make millionaires of Homebase’s 60-strong management, who between them own 12 per cent of the group. An idea of the returns gained can be gleaned from Permira investor, the Schroder Ventures International Investment Trust which committed GBP20 million to the deal and will receive GBP109 million back.

In a complex deal involving equity, debt, shareholder loans and property transactions, Sainsbury originally received GBP969 million for the business in December 2000. Permira acquired a 70 per cent stake for GBP750 million, Sainsbury retained 18 per cent and management the remaining 12 per cent. Permira’s investment in the business was reduced by selling land and stores to B&Q totalling GBP273 million in two transactions. The firm also received GBP259 million from the sale and leaseback of sites to Sainsbury. In April, Homebase was recapitalised and Permira was returned 97 per cent of its original investment see evcj May, page 22.

Charles Sherwood, partner at Permira, said: “We were very pleased with the price for the transaction. This has been a very good deal. Most importantly, it’s been a great deal for all concerned. Permira Funds, Sainsbury, Homebase employees and customers have all benefited from the significant changes made to the business over the past two years.”

Sainsbury has indeed done well on the deal. The group originally stated the objective was to sell Homebase for GBP1 billion in total it will have gained well in excess of that target. Sherwood says GUS has paid a fair price and will do well out of the acquisition, having made a strategic acquisition of a strong, well differentiated and highly performing business.

“The reason everyone has done well is clear,” he says. “Homebase has achieved like-for-like sales growth of circa 16 per cent and a three-fold increase in trading profit.” A cautious estimate from GUS, he says is that profits will reach GBP100 million in January 2003.

Over the past two years the business has been strategically repositioned to differentiate it from its competitors and to create a one-stop shop for the home enhancement customer. “The management has moved the business from being a head-to-head competitor with stores such as B&Q to the softer end of the market aimed at the traditional Homebase customer the ABC1 woman. That customer is more interested in what’s in front of the plasterboard than behind it,” says Sherwood.

Permira’s realisation has been the most successful exit so far this year. Until now, 3i’s sale of no-frills airline Go to easyJet and Morgan Grenfell Private Equity’s sale of Coral Eurobet to Charterhouse Development Capital are the major exits this year to have hit the headlines. Both firms managed to make a return of almost three times their original investment. 3i and Barclays Private Equity bought a 62 per cent stake in Go in June 2001 for GBP83.5 million, as part of a deal valued at GBP110 million. Go was sold for GBP374 million in cash, representing a profit of GBP231 million for 3i. MGPE sold Coral Eurobet for GBP860 million having acquired the betting business for GBP390 million in 1999.