June 28, 2009 6:55 pm

Valentino hits Permira’s pockets

Private equity’s costliest excursion on to the catwalk risks turning into a flop as Permira, the UK buy-out house, nears completion of talks with lenders to Valentino, the Italian fashion house, about renegotiating its €2.5bn (£2.1bn) debt.

Valentino, dressmaker for some of the world’s most glamorous celebrities from film star Nicole Kidman to Crown Princess Marie-Chantal of Greece, was bought by Permira in a €5.3bn deal in May 2007, the peak of the credit bubble.

However, as the financial and economic gloom has spread to even the super-rich it has triggered a drop in sales across the luxury goods industry.

The woes of haute couture were highlighted in May as France’s Christian Lacroix filed for bankruptcy.

Valentino, which owns 75 per cent of Hugo Boss in Germany, warned of a “negative performance of the retail business” in the last six months of 2008 as it reported sales of €2.2bn for the year, a rise of 3 per cent adjusting for currency swings.

A person familiar with the company said it was expected to announce in the next few weeks that it had secured a “standstill agreement” with its banks.

This should give the company breathing room to avoid a potential breach of its bank covenants and to negotiate looser conditions on its bank debt to reflect an expected further slowdown in sales.

Buy-out groups have in some cases during the credit crunch injected more money and lenders have taken stakes by swapping debt for equity.

However, the person familiar with Valentino said its lenders – led by Citigroup, UniCredit and Mediobanca – were not expected to push for a debt-for-equity swap and Permira was unlikely to inject more equity.

More than three-quarters of Valentino’s sales come from Hugo Boss, which also provided 90 per cent of the group’s total €320.4m earnings before interest, tax, depreciation and amortisation last year.

However, Hugo Boss faltered in the first three months of this year, as sales fell 5 per cent and consolidated earnings dropped 2 per cent. Permira wrote down its investment in Valentino by more than half in December.

Private equity rushed to buy luxury goods companies at the peak of the credit bubble, including shoemaker Jimmy Choo and the Ferretti super-yacht business.

But it raised eyebrows at the time, as luxury goods executives – including Richemont boss Johann Rupert – questioned the wisdom of investing in a cyclical industry using record levels of debt at the top of the market.

Permira has written a number of its investments to zero, including Borsodchem, the Hungarian chemicals maker; Cortefiel, the Spanish clothing retailer; and Gala Coral, the UK betting and bingo group.

Yet it also has strong performers, such as frozen-food maker Birds Eye Iglo, clothing retailer New Look and insurance-to-auto repair group Acromas.

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