LONDON — It looks to be a reluctant bride, but Debenhams appears ready to tie the knot.
After drawn-out discussions — and with no other firm bids on the horizon — Debenhams directors have unanimously recommended Permira’s bid to buy the U.K. department store for about $2.5 billion.
However, they’re keeping their options open. Debenhams and Permira released a joint statement Tuesday saying that Debenhams’ independent directors had accepted Permira’s cash offer of $6.93 per share, valuing the firm at $2.5 billion. Dollar figures have been converted from the pound at current exchange as Permira offered 425 pence per share for a total of 1.54 billion pounds.
As reported, Permira, a U.K.-based private equity firm, has been working with Debenhams chief executive Belinda Earl and her team on a management buyout. The price agreed to Tuesday was identical to the indicative offer of $6.93 made in mid-May.
Debenhams shares shot up 2.3 percent after the announcement, closing above the offering price at $7.05.
“The offer represents a proposal worthy of serious consideration in the absence of a higher offer being received. The independent directors…recommend unanimously that shareholders accept the offer,” the statement said.
Charles Sherwood, a Permira partner, added, “We are delighted that the independent directors of Debenhams have decided to recommend unanimously the offer, which is at a significant premium to the company’s average share price over the last year, and we look forward to working with Debenhams’ management and employees.”
However, sources close to Debenhams said this is not a classic management buyout. If the bid is successful, Permira will delist the store and run it as a private firm — with management’s blessing.
Permira said in a separate statement Tuesday that if its bid is successful, Stuart Rose, the former chief executive of Arcadia Group, would be named nonexecutive chairman of Debenhams. During the Nineties, he held various positions at Arcadia, Debenhams’ former owner, including chief executive of retail chains, prior to its decision to spin off Debenhams as a separate company. Arcadia was known as Burton Group prior to the spin-off.
Despite its decision to recommend Permira, Debenhams is keeping the door wide open for a rival offer. The store made it clear Tuesday that it is still in talks, albeit preliminary ones, with CVC Capital Partners and Texas Pacific Group, who have joined forces with the aim of proposing a rival bid. A spokesman for TPG confirmed that discussions with Debenhams are continuing.Tuesday’s statement said the terms of the offer represent a 28.5 percent premium to the closing price on May 9, the last business day prior to the commencement of the offer period. Permira’s offer is also 50.8 percent higher than the average closing price during the six months prior to May 9, and 112.5 percent higher than the low of $3.26, or 200 pence, in the 52 weeks leading up to May 9.
If CVC/TPG comes forward with a higher bid, Debenhams will pay Permira a breakup fee of $13.4 million, or 8.5 million pounds, the statement said. As reported, and to the chagrin of some shareholders, Debenhams has also promised to subsidize its bidders. It said Tuesday that if CVC/TPG notifies Debenhams prior to Sept. 30 that they no longer wish to proceed with a possible offer, the store will pay them up to $9.8 million, or more than $1.6 million a week, to help cover the cost of due diligence.
It doesn’t end there: If CVC/TPG’s bid is trumped by a third bidder, the joint investment group would also receive a breakup fee of up to $13.4 million, or 8.5 million pounds.
Some Debenhams shareholders were not jumping for joy at the preliminary agreement. A spokesman for Standard Life, which has a 4.9 percent stake in the department store, said, “The current bid is clearly too low.”
Rupert Trotter, retail analyst at ISIS Asset Management, which also has a stake in Debenhams, said, “This is a very well-placed bid considering there is only one company looking to buy, but I think there is the scope for bids to go as high as $7.34 (450 pence) or $7.74 (475 pence) because this is a store that’s growing. Debenhams is talking about adding 50 more stores. This is no cost-cutting operation.”
Trotter added that shareholders might just decide to walk away from Permira, even if no other bidder materializes: “Shareholders could wait 18 months, and may very well see the share price go higher than what Permira is offering.” he said.
The joint statement also updated some details about the 102-unit Debenhams business. Since 1998, when it de-merged from Arcadia, it has opened 19 stores and averaged annual capital spending of approximately $194 million, or 119 million pounds. In the past five years, same-store sales have grown an average of 3.4 percent and compound annual growth of earnings per share has averaged 4.6 percent.Over the past two fiscal years, basic earnings per share grew at a compound annual growth rate of 12.4 percent. Its combined property holdings are worth $721 million, or 442.3 million pounds.
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