The IUF's Private Equity Buyout Watch: Merrill Lynch Warning as Private Equity Targets Big Retail: "If we don't stop it, everyone will be up to their necks in debt"

Property portfolios tempt buyout appetites, prompting retailers to "unlock value" themselves through selloffs.

source: www.just-food.com

A top industry analyst has warned that all of the world's retail giants are vulnerable to bids from the cash-laden private equity sector.

Andrew Fowler, managing director at Merrill Lynch and a 20-year veteran of the retail sector, sounded the warning amid growing private equity interest in retailers.

The relative ease of securing borrowed funds cheaply has left private equity groups with around GBP500bn (US$993bn) of "firepower looking for a home", Fowler said. Bigger retailers, with a rich portfolio of property assets, are most attractive to private equity, he added.

Last month, Sainsbury's rebuffed a takeover bid from private equity group CVC but some shareholders in the UK retailer still want the company to unlock some of the value in its property portfolio, which is said to be worth GBP10bn.

Furthermore, investors in the world's leading retailers are growing frustrated at the lack of returns from the companies' investment in developing markets, Fowler said. That dissatisfaction has led certain shareholders to eye retail property as a way of boosting their returns.

"When it comes to developing markets, it's not been as easy as we thought it would be," Fowler said yesterday (3 May) at the IGD Global Retail Conference in London. "From a shareholder's point of view, there is not yet the return on investment."

As a consequence, Fowler said, it is not just Sainsbury's that is exposed to bids from private equity. Larger, more global retailers may also find themselves the subject of takeover offers.

"Is everyone vulnerable? Metro, which is owned by families living in tax exile in Switzerland, has been under pressure to sell property. At Carrefour, shareholders are agitating for the company to sell property now," Fowler said.

"And at Tesco, a couple of weeks ago, they doubled the amount of cash they are giving back to shareholders. There is a concern that what has happened to Carrefour could happen to them."

Fowler warned of the possible threat to suppliers of private-equity owned retail groups. "If we don't stop it, everyone will be up to their necks in debt," he said. "Retailers will have to pay their interest bill and that could lead to margin compression, or suppliers will have to give buyers longer credit. Then, the ownership of your retail client will change hands again in 2-3 years."