Apax bid for House of Fraser hits the buffers

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The Independent Online

The £330m takeover talks between Apax and House of Fraser have ended, with some suggesting that the departure of a key executive at Apax had hobbled its bid effort.

The department store group House of Fraser yesterday announced that "very preliminary talks regarding a possible offer for the company have ceased", without giving any reason. The company revealed that it had received an approach, from an unnamed party, on 24 February.

It is thought that House of Fraser believed that the Apax approach undervalued the company. A price was never publicly put on the offer but speculation put it at some 140p a share. A number of other private equity bids in the retail sector have failed recently, including approaches for HMV, WH Smith and Woolworths (which was another Apax offer).

Some in the City pointed out that Mike Ward, who was heading the bid team at Apax, quit this week to become managing director of Harrods. Others said however that Apax has a large retail team and it was unlikely that the loss of one person would alone sink the bid. Among Apax's acquisitions in the retail sector are New Look and Somerfield.

The House of Fraser takeover talks were said to have been at too early a stage for due diligence to start or the pension fund situation to have been an issue.

Richard Ratner, an analyst at Seymour Pierce, said: "It was going to be difficult to value the business on a normal VC [venture capital] formula.

"This is because of a combination of the property situation (50 per cent owned in an off-balance sheet geared vehicle), the committed capex requirement rather than just maintenance capex, and the future income stream from the store card which doesn't return until 2007."

House of Fraser, split off from Harrods by Mohammed al-Fayed, came to the stock market in 1994. It subsequently sold off the future income from its store card, a deal that comes to an end next year.

The company, under its long-serving chief executive John Coleman, has pressed through a number of other initiatives that would typically be carried out by a private equity owner.

It has sold and leased back a significant part of its property portfolio, including the stores from last year's acquisitions of Beatties and Jenners. Some £20m has been cut out of annual costs. It has a new store opening programme that requires investment. Unprofitable sites have been sold off, including two of London's best known department stores, Dickens & Jones on Regent Street and Barkers in Kensington.

The 150-year-old retail group also owns the Army and Navy store brand. It has 61 stores across the country, covering 5.4 million square feet.

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