Oulook: Little wonder in Woolies for private equity

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The Independent Online
APAX PARTNERS is a serious private equity player which has recruited an impressively accomplished operator to its cause in the shape of Roger Pedder, but whether anything will come of its mooted bid for Woolworths is open to question.

The price being bandied around in the stock market of 60p a share, or pounds 850m in total, is both too small for shareholders to want to accept and too high for private equity to pay. Dealing with the shareholders first, 60p amounts to little more than a quarter of sales or 6.4 times this year's expected earnings before interest, tax and depreciation. That's quite a bit lower than most other retailers.

Of course, there are good reasons for this relative undervaluation. Woolies is being squeezed by the advance of the supermarkets, nearly all its property freeholds have already been mortgaged off, its margins are thin and, despite having got rid of most of its legacy pension liabilities at the time of its demerger from Kingfisher, there's still a pounds 66m deficit in the remaining pension fund. Yet not withstanding a disappointing Christmas, the business is operationally still on an improving trend. Prospects are good if unspectacular.

The business was nearly sold to private equity at the time of the demerger. Gerald Corbett, the chairman, had to fight Geoff Mulcahy like an ally cat to prevent it, and it seems to have paid off. Floated at just 25p three years ago, the shares were last night trading at more than 50p.

So why would private equity want to buy Woolies now, with the price much higher, the low hanging fruit already plucked and precious few juice-bearing goodies on the higher branches to reach for? The case seems harder to make than ever.

Apax's interest may be explained only by the fact that there's so much money sloshing around private equity looking for a home, that almost anything will do. The lack of a decent property portfolio makes Woolies unattractive for the highly leveraged transaction that underpins the economics of most venture capital deals. There are assets that could be sold to pay down debt, in particular the property assets of Big W, the distribution business and the joint venture with the BBC. Woolies also enjoys some of the same cash cow attributes that have made retail as a whole attractive to private equity.

Yet both of the last two private equity assaults on the high street - JJB Sports and WH Smith - collapsed once the protagonists had got in to examine the books. The effect in both cases was to undermine the business and destabilise the share price. Unless the price is a good one with few conditions attached, Mr Corbett would be well advised to show Apax the door.