Sanjay Dalmia’s GHCL Eyes Apollo PE-Backed Linens ‘n Things
The US economic slowdown is throwing up a raft of new opportunities for Indian companies who have been eyeing acquisitions in the global market. Sanjay Dalmia-owned GHCL (formerly Gujarat Heavy Chemicals Ltd.) is one among those companies apparently in the race to acquire Linens’n Things, the second largest speciality home furnishings retailer in the US, says a report.
Linens’n Things operates close to 600 stores across the United States and Canada with sales of about $2.8 billion. It is second largest in terms of stores behind Bed Bath & Beyond which has more than 800 stores in the US.
If the deal actually sails through, it would be one of those rare cases where large buyout firms have burnt their fingers by acquiring medium and large sized consumer goods or services firms at a time when the economy was on the verge of slowing down.
Linens’n Things is owned by veteran buyout king Leon Black’s (who has plenty of experience profiting from bankrupt companies) private equity firm Apollo Management which acquired the US retailer for $1.3 billion in 2005 along with its investment partners Silver Point Capital and National Retail & Development Corp. Poor sales record in the wake of housing market slump in the US has forced Linens ‘n Things’ parent company Linens Holdings Co to file for bankruptcy protection under Chapter 11 early this month.
The filing comes at a sensitive time for Apollo which is planning for an initial public offer sometime in near future. Such assets in the books may not send good vibes for a company going public.
Linens’n Things was anyway looking for buyers. According to a report in New York Times, the retailer had hired Financo, an investment bank specialising in retail companies, to find a buyer while it sought ways to avoid filing for bankruptcy.
Valuation
Linen ‘n Things which operated 589 stores across US and Canada as of December’07 is closing 120 stores in the US as a part of its restructuring process. The board of directors of the firm has named financial restructuring expert Michael Gries as the interim CEO of the retailer. After the restructuring, the valuation of the company might actually be lower than what Apollo paid two years ago.
For the year ending December’07, the firm reported net sales of $2.79 billion which was down marginally by 0.9% compared to the previous year. Net loss of the firm, however, widened to $242.1 million compared to $154.4 million in 2006.
When Apollo bought the firm it had EBITDA of around $152 million which mean a deal with EBITDA multiple of around 8-9 times (deal value of $1.3 billion). But 2005-06 was the peak period for buyout firms and so were the valuations fixed quite aggressively.
On the one hand, the economic slowdown is affecting consumer spends in the US and the financial mess at Linens’n Things coupled with its losses would further dilutes its value. The EBITDA for FY’07 was in the red (-) $26.2 million as against $61.6 million in 2006. However, there are two big pluses going for the firm. Its brand value and its real estate assets.
If we average out the EBITDA for the last two years ~ $40 million and peg it on a 6-7 multiple, then its financial valuation could be around $300 million. With brand image and other assets added, the total value could be around $500 million.
GHCL: A Possible Buyer?
In the past, GHCL was ready to acquire a U.S.-based retail chain for around $200-400 million. It would be interesting to see if Apollo goes ahead with such a big writedown on its investments in Linens’n Things. Another option could be where GHCL acquires 50 per cent stake and lets Apollo continue as an investor.
This could be a probable scenario as GHCL itself is not sitting on a huge pile of cash. Many of its bets have not yielded big results. Though the acquisition deals it struck in 2005-06 period did bring it small sized firms at cheaper valuations, it could not capitalise on them for expanding as fast as it intended to do. At one point of time the management had indicated that they were looking at global revenues of $4 billion by 2008-09. But it is nowhere close to the $1 billion mark as of now.
However, the big carrot for Sanjay Dalmia would be that if GHCL snaps the firm it would become one of the world’s largest speciality home textile retailers. GHCL already operates close to 300 stores in the UK through Rosebys, the nations largest home textile retail chain, which it had acquired in 2006 for about $40 million. With Linens’n Things it would have another 460 odd stores which would make it a close second to Bed Bath & Beyond.
Incidentally, GHCL which is in the process of demerging its chemicals, home textile manufacturing and retailing business under three separate firms, had recently indicated plans to enter the US home textile retail market. One of the reasons for the demerger was to spin off retail into a separate global firm under Rosebys which could then raise funds for further expansion. Whether Linens’n Things is one of them is yet to be seen.
What could be a stumbling block for GHCL is funding. It has a market capitalisation of $200 million. The cash reserves are not sound and even the local markets are not conducive for an IPO even for a retail firm.
The other option could be a Special Purpose Vehicle (SPV) route to acquire either with some other PE fund or with Apollo retaining part of the stake.
Apollo’s Moves
Apollo has already shown interest in preserving its equity value in Linens’n Things. According to reports, Apollo has been buying Linens’ debt. By becoming a major bondholder and creditor, Apollo would have more say over the reorganisation plan, and could force a debt-to-equity swap enabling it to maintain its ownership.
This is an unusual thing for a buyout firm that is acquiring the distressed debt of a bankrupt company whose equity it already owns. Analysts are watching this space closely as increasingly more PE-backed companies end up bankrupt and the out-of-money fund managers might have to resort to such tactics.
Financial Re-engineering
Last week, Linens ‘n Things announced that it has received an interim court approval for $700 million debtor-in-possession financing that will allow the company to continue to operate during the court proceedings. The retailer has secured the finance from General Electric’s commercial finance arm which already has a $700 million line of revolving credit with Linens’n Things.
Other Suitors?
Bids for big names hardly go uncontested and Linens’n Things may not be different. There are some market rumours attaching names like Alok Industries’, Trident, S. Kumars and even Reliance Retail as probable suitors for Linens’n Things. The key could be the valuation — if it goes for a song, say $100-$200 million, all of these and many more could become likely buyout firms.
