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Last updated: January 31, 2010 8:19 pm
John Lovering, the veteran retail executive with a long history of private-equity deals, has teamed up with buy-out house Permira to prepare a bid for DFS, the sofa chain being sold by its founder Lord Kirkham.
The auction of DFS, which is valued at about £500m, has attracted interest from several other private-equity groups, including Advent International and Cinven.
Any deal would mean a windfall for Lord Kirkham, who founded the company 35 years ago and took it private again for £507m in 2004, after an acrimonious battle with shareholders who accused him of buying it back on the cheap.
Goldman Sachs is advising Lord Kirkham on a strategic review at DFS.
The DFS chairman may have been encouraged to float or sell by signs of growing private-equity interest in the retail sector.
Kohlberg Kravis Roberts last week agreed to pay £955m for Pets at Home, more than 11 times the UK pet store’s earnings.
However, bankers are surprised that private equity is interested in DFS, which they say is vulnerable to rising interest rates because of its exposure to the property market, a key driver of demand for its sofas.
Mr Lovering stepped down last year as chairman of Debenhams, the fashion retailer, which made big profits for its former private equity owners. He was appointed as chairman of pub group Mitchells & Butlers last week in a boardroom shake-up.
The former Debenhams chairman is a veteran of private equity and has previously run the Homebase retail chain, Odeon cinemas and Fitness First gyms for buy-out owners.
Mr Lovering is also relaunching his own Echelon Partners private-equity venture.
In spite of the recession – which has dented demand for big-ticket items such as furniture – and increasing competition from supermarkets, DFS has benefited from the demise of rivals such as ScS Upholstery and Land of Leather.
In the year to August 2009, the 78-store sofa retailer made earnings before interest, tax depreciation and amortisation of £86.7m, up 42 per cent on the previous year, and Lord Kirkham was paid an £11.3m bonus.
Meanwhile, although the Christmas season was generally better for retailers than many had expected, concerns are rising about the outlook for this year, given the prospect of tax rises, higher interest rates and cuts to the public-sector workforce.
Insiders, however, were sceptical that a part sale or initial public offering would come to fruition.
They pointed out that Lord Kirkham had carried out similar reviews in the past which had come to nothing. Bankers said private equity could struggle to raise debt to buy DFS.
Nomura, which provided £360m of debt for Lord Kirkham’s takeover of DFS in 2004, is advising Permira and Mr Lovering. All parties declined to comment.
DFS still had total borrowings of £360m at July 2008. This is estimated to have fallen to about £330m, which should generate a profit for Lord Kirkham if it is sold for about £500m.
One person familiar with the situation said: “I can’t imagine that Lord Kirkham is planning to sell the business for anything other than a profit.”
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