Ratner mulls H Samuel bid as private equity firms eye £2.3bn Signet offer

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The Independent Online

Bidders are circling Signet Group, the transatlantic jewellery business, which has been approached by private equity groups and whose former boss, Gerald Ratner, has appointed advisers to consider an offer for its H Samuel chain in the UK.

Signet shares soared yesterday after Kohlberg Kravis Roberts and Apax Partners said they had joined forces to examine a joint bid for the company.

A deal could value Signet at up to £2.3bn - a sparkling price indeed for a company whose products Mr Ratner once described, in a misfiring joke that ended his career at the company, as "total crap".

Mr Ratner has appointed BDO Stoy Hayward as financial advisers to help him prepare a bid for H Samuel in the event that Signet is acquired. He said he believed that a buyer may want to split off the underperforming chain, and he renewed his criticism of Signet's management for trying to pretend H Samuel is more upmarket than it really is.

He stopped short of describing its products as "crap", though. "I just think that H Samuel is a mess. It's got the wrong product at the wrong price and with the wrong displays," he said, but it could be turned around quickly. "We certainly would be very interested in buying it. It's got the most marvellous locations, marvellous staff and a marvellous name."

Signet warily noted the interest from KKR and Apax yesterday, but said there had as yet been no formal offer. It was unclear whether the pair were planning to ask Terry Burman, Signet's respected chief executive, to buy into the deal and continue to run the business, or whether they would install their own management team.

KKR and Apax said they had "jointly undertaken a preliminary analysis of the company and that the analysis included the consideration of a possible offer for the company".

Although they told Signet of their interest last month, they have not yet met with management, and a report that their bid would be pitched at 132p per Signet share was "ill-founded", according to sources.

The joint statement added: "No decision as to whether or not to progress with an offer has been made and, as a consequence, there can be no assurance that any offer for the company will be made."

Signet shares jumped 15 per cent to 116.75p, and analysts said that, at 132p, shareholders would almost certainly clamour for a deal. Nick Bubb of Evolution Securities said: "That would be very attractive."

Signet's recent trading has been mixed, with weakness in the UK offset by storming sales in the US, where diamonds are the jewellery store owner's best friend. More than 70 per cent of Kay and Jared revenues come from diamonds, and the rocks are among the products marketed most heavily under the slogan "Every kiss begins with Kay".

The company said yesterday that overall sales in the first half of its financial year were up 7 per cent in the US and flat in the UK (10.3 per cent and 0.6 per cent, respectively, in the second quarter). But it also cautioned that the US was not likely to continue at the same pace of growth, with housing-market weakness and sky-high petrol prices among the factors putting a brake on consumer spending.

So rather than short-term trading, Signet's defences against the barbarians now coming up the path are likely to involve restating its long-term growth opportunities in the US, where the jewellery market is ripe for consolidation. Despite being the largest specialist jewellery chain in the US - it overtook Zales last year - Signet has just 8.2 per cent of the specialist market, and just under 4 per cent, if department store and supermarket sales are added in.

Walker Boyd, the finance director, said Signet was investing $1bn (£550m) over the next five years to add 40 per cent more stores, and there would be economies of scale that would allow it to beat smaller competitors. "The opportunity for us is to be taking market share from the smaller chains and independents. I think the [UK stock] market understands the opportunity."

The approach by KKR and Apax underscores again the power and ambition of private equity groups. New York-based KKR, whose retail assets include Toys R Us, raised €4.5bn (£3bn) for European takeovers in November, while London-based Apax, which has more expertise in the UK retail sector, is investing a €4.3bn fund it closed last year.

The march of these financial buyers has fundamentally reshaped the way retail executives run their businesses, and that may be one of the reasons more private equity bids have failed than succeeded in the past two years, according to Christian Koefoed-Nielsen, a retail analyst at Panmure.

Savvy managements have stolen some of private equity's tricks, agreeing to take on more debt and hand back cash to shareholders via share buy-backs that boost the stock price. HMV, Boots and Topps Tiles are among those to have moved dramatically in this direction.

Mr Koefoed-Nielsen thinks that Signet could increase the amount of debt on its books by an extra £750m. "The more we see meaningful private equity bids, the more the pressure on managements who are sitting on balance sheets that are more than comfortably geared. Shareholders will start saying it is all very well being conservative, but management is giving themselves a wide margin forever in order to have a quiet life."

If KKR and Apax do decide to proceed and ask for talks with management in the next few weeks, it may well be other private equity groups will also run the slide rule over the business. Some analysts yesterday thought that one plan could be to buy both Signet and Zales and do the merger that the two sides briefly considered earlier this year (before Zales got cold feet, within hours of the flirtation being made public).

Mr Ratner thinks that, in almost any scenario, he has a chance of getting his hands back on H Samuel, which analysts have estimated could be worth about £100m. He last purchased the jewellery chain in 1986 when it was a public company not making any money.

Now he hopes to rebuild his jewellery empire, currently focused on his online venture, Geraldonline, which he is preparing for a flotation on AIM next year. If he bought H Samuel he would take the chain back to what he believes are its downmarket roots. "H Samuel is a mass market retailer. The shops don't look anything but mass market. Signet put their prices up, which doesn't work in the context of a downmarket retailer.

"The only way H Samuel could work is to be competitive. It needs to be pitched at the lower end of the market. I'd like to slug it out there. They don't want to be there, but I do."

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