Narrow field for Shop Direct buy sees Apax leading, but US bidder enters race

By

Sandra Halliday

Published
Jun 19, 2017

Private equity firm Apax Partners seems to be the frontrunner to buy fashion and general merchandise e-tail giant Shop Direct, yet it’s still not a one-horse race with San Francisco-based private equity house Hellman and Friedman also reported to have entered the fray.

But while current owners the reclusive Barclay brothers are said to have put a £3bn price tag on the firm, the new bidder is believed to be offering just £2.5bn.

Why is Apax the favourite to win the race? Well, the former owner of New Look is seen as the most likely to pay close to £3bn. It has more than one competitor though with BC Partners also in the running, according to the Sunday Times.

While analysts have questioned the high asking price for the owner of the Very, VeryExclusive and Littlewoods brands, it’s undeniable that the e-tail giant is buoyant. The company’s profits rose as much as 44% last year to top £50m on sales of £1.9bn. And we know that the Very businesses that focus on fashion had a strong Christmas trading period.

However, the weaker consumer environment that’s been hit by inflation, by Brexit-linked uncertainty and stagnating wages, could undermine future fashion sales, as well as purchases of big-ticket items. The DFS furniture chain’s weak results last week have spooked analysts when it comes to consumer interest in high-price items like furniture.

Another major stumbling block could be Shop direct’s heavy reliance on credit terms to sell its goods. From its origins as a pay-weekly catalogue retailer, it’s now one of the biggest retail credit providers in Britain as its customers take advantage of its pay-in-instalments service in large numbers. Over 90% of sales are on credit terms. Analysts think increasing regulation around credit services could dent its appeal with the high interest rates it’s able to charge being under threat.

In fact, the reliance on credit to drive profits could mean a triple negative effect for the firm. Not only would any consumer downturn meaning it losing overall profit from selling individual items, but it would also lose the ongoing profits from the credit operation. And while ‘have now, pay later' is appealing, under-pressure consumers could baulk at interest rates of up to 40% meaning they might be more likely to shop elsewhere.

It’s unclear what conditions Apax has placed on its £3bn bid. If the company pulled out of the process or managed to negotiate the price downwards, other potential bidders could emerge.

But that pre-supposes that the current owners are committed to selling. The billionaire Barclays have no pressing need to sell and The Sunday times cited sources saying that they could remove the ‘for sale’ sign from the business if the price falls too far.