Public to Private Transactions, Private Equity Ownership and IPOs: A Case Study of Debenhams

Abstract

This paper reviews the case of Debenhams (UK retailer) since it was taken private in 2003 by private equity funds, through its private equity ownership period, its IPO in 2006 and its subsequent underperformance. We investigate the period preceding the public to private, the valuation at this time, the deal structure and its funding – in particular the high amount of debt the company has been left with after its private equity ownership period. We also review the actions of its private equity owners to extract value and realise abnormal returns in a short period of time and the impact of such actions for Debenhams and its shareholders post-IPO. We look at the IPO and the subsequent underperformance of the Debenhams stock and the actions taken by management to address the issues of a highly leveraged company and reduce net debt. We find that Debenhams has been financially weakened by its private equity ownership period, especially through sale of freehold property (resulting in higher rent payments), high debt (creating a higher interest burden) and reduced capital expenditures (which will need to be compensated later). We also identify that Debenhams’ board had to cut dividends and propose a scrip dividend scheme in order to reduce its cash outflows and hence improve its net debt position. It also had to improve its working capital cycle by lengthening its suppliers’ payment terms.The state of Debenhams’ balance sheet after the private equity ownership period, significantly impacted by both the absence of its freehold properties and massive net debt, reduced the options available to the shareholders as these elements weighted negatively on shareholders’ returns and made a new takeover highly improbable.In the coming years, many other companies could be affected by similar issues as a vast amount of debt will be required to refinance the excesses of the past LBOs.