Outlook: GUS rides the consumer boom with Homebase acquisition

Scrapping polarisation within the FSA market /Stakeholder pensions

Everyone wins from GUS's £900m acquisition of Homebase, or that, at least, was how the story was being spun yesterday. The biggest winners are plainly Permira, its investors and the Homebase executive team. They'll have made four or five times on their original capital, not bad for just two years of ownership.

But GUS wins too, Permira was keen to stress. There's still plenty of upside at Homebase, the deal will be earnings enhancing from day one, and the business neatly fits in with GUS's plans for expanding its Argos home furnishing sales. Why, even dear old Sainsbury's, which sold Homebase to Permira for a fraction of the price two years ago, is a winner too, since it retained 17.3 per cent of the equity, on which it will have made a return as dramatic as everyone else.

Nobody was being specific yesterday about what the precise numbers are, suffice it to say that the original buyout from Sainsbury has worked like a dream for Permira. The venture capital firm originally paid £696m for Homebase, of which it immediately realised £259m by doing a sale-and-leaseback deal with Sainsbury on the freehold assets.

As part of the transaction, Sainsbury was even prevailed upon to provide £75m of the debt finance. The total equity involved was little more than £100m. This was a leveraged transaction, so some of the £900m now being paid by GUS will go towards paying down the debt finance.

Even so, Permira and its backers have made a spectacular return. The plan had been to float Homebase on the stock market this autumn, but fortunately the dire state of the IPO market intervened. Fortunately, because even if stock markets had been conducive to IPOs, they could not have given Permira as low cost, clean and high priced an exit as this. So is GUS overpaying? There's certainly a risk of it.

Buying assets from venture capitalists is never without risk. The very term venture capital is something of a misnomer. This is not start-up capital. Rather, the idea is to buy existing, healthy businesses from distress sellers using mainly debt finance. The venture capitalist will then run the business for cash, sweat the assets and generally strip the bones clean of all flesh to pay down the debt, which is why they are sometimes referred to as "vulture capitalists".

It's financial engineering and those silly enough to buy from venture capitalists shouldn't be surprised if when they walk through the door of their newly acquired company, all they find is an empty shell with barely so much as a light fitting left hanging. John Peace, chief executive of GUS, insists he was alive to the possibility with Homebase, but that it is simply not true in this instance. Profits are rising strongly, like-for-like sales are leaping ahead and the management has made terrific progress in shifting the company away from its roots in DIY into a more rounded "home enhancement" business. Mezzanine levels have been built in27 warehouses, expanding the floor space by 25 per cent in each case, new product ranges have been introduced, there's been heavy investment in IT and stock control, and so on and so forth.

I'm not so sure. DIY and home improvement has been a big growth market in recent years, for the obvious reason that house prices have soared and consumer spending has been strong. In the words of Mervyn King, deputy governor of the Bank of England, this is plainly unsustainable. There may be a nasty demand shock in store for the DIY sheds. The last time I went into a Homebase, the on shelf stock was so poor that I had to go down the road to B&Q to get what I wanted. Needless to say, I have not returned. Homebase insists otherwise, but my impression was very much of a company that was being run for cash.

Still, the City seemed pleased enough with the deal yesterday and GUS shares went up 6 per cent. This is not another conglomerate acquisition, says Mr Peace, but rather an attempt to build on the success of Argos in homewares. The deal will be worth £20m in annual buying and other synergy benefits within three years, he reckons, and he shares Permira's optimism about Homebase's ongoing growth prospects. If Homebase has still got so much upside, why is Permira selling so soon? It doesn't pay to be greedy, says Permira. Indeed it does not. GUS shareholders will just have to hope they are not being fleeced.

Scrapping polarisation

I'd just like to make it absolutely clear that Sir Howard Davies, chairman of the Financial Services Authority, never said he would like to put all independent financial advisers into a barrel and shoot them one by one. Definitely not. Nothing could be further from the truth. Sir Howard has the highest possible regard for the IFA community and would never wish them any ill, still less say such a dreadful thing. We are happy to clear up this unfortunate misunderstanding once and for all.

So how come they all think he's got it in for them? Like Daniel into the lions' den, Sir Howard confirmed at the Association of Independent Financial Advisers annual dinner last night that he is pushing ahead with abolition of the polarisation rule, a piece of financial services deregulation which for many IFAs is tantamount to a death warrant. As things stand, those selling savings products must either be independent (an IFA), selling across the spectrum of products and companies on the market, or tied and represent just one company. Sir Howard intends to scrap this rule, allowing big banks and life assurers to sell whatever they want. The upshot will be more choice for most consumers, he argues.

For many IFAs, on the other hand, the upshot will be disaster culminating in closure. Business will gravitate away from the little guy towards the industry's big battalions. There are a few concessions. The Financial Services Authority has stepped back from the idea that IFAs be forced to charge for advice through an upfront fee, rather than commission on the products they sell. It also promises to abolish the "better-than-best" rule, which prevents IFAs from recommending a product from any provider that owns more than 10 per cent of the firm. The latter development may provide a way forward for some IFAs.

Even so, it's a cold and bleak world the IFA community is about to enter, and many won't survive the first winter. Financial regulators have always had a problem with the tens of thousands of IFAs that populate the land. There are just too many of them to keep an eye on, and the FSA would much rather that selling was concentrated in fewer hands. Scrapping polarisation may not amount to getting them all in a barrel and shooting them one by one, but some might think it pretty similar.

Stakeholder

Stakeholder pensions, the centre piece of the Government's various initiatives for closing the savings gap, have been an abject failure. Scarcely more than a million have been sold since their launcha couple of years back, and sales have since slowed to a trickle. The majority of employer-designated schemes have no members and, even where they do, few employers make contributions.

To the extent that stakeholders have achieved any success at all, it is largely among middle-class earners using them as a tax-efficient way of saving for their spouse or children.

There are two main reasons for the failure. One is that the 1 per cent price cap is too low to make it worth the industry's while to put any capital or marketing spend behind the product. Costly regulation has further exacerbated the problem. Second, there are no incentives to encourage employers to contribute. Digby Jones, director-general of the CBI, says he wouldn't mind compulsion, provided contributions are defrayed through national insurance rebates. Don't hold your breath, Digby.

jeremy.warner@independent.co.uk