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The Debenhams Deal: Autopsy of a Quick Flip

In 2003, Debenhams, a department store chain with 142 units in the UK and Ireland, was taken private by three private equity funds: CVC, TPG and Merrill Lynch Private Equity.

The buyout, accomplished with GBP 1.4 billion in debt and GBP 600 million in equity, was described in the IUF's A Workers' Guide to Private Equity Buyouts, as "financed by mortgaging the real estate on which Debenhams stores are situated, as well as loans made against the company’s assets. Through dividend recaps, company debt was increased to £1.9 billion to finance a dividend payout of £1.2 billion to the 3 private equity firms…With the £1.2 billion dividend alone the private equity firms doubled their money in just 30 months, leaving Debenham’s seriously indebted."

The story, however, doesn't stop there. Debenhams was relisted in May 2006 at a price of GBP195p per share. With the public offering, the buyout funds tripled their initial investment. Following the initial public offering, TPG retained 14 percent of the shares, CVC 9.7 and Merrill Lynch 8.5.

With over GBP 1 billion in debt still on the books, Debenhams has struggled, and has struggled even harder in the face of a consumer spending downturn. Merrill Lynch sold some 2-3 percent of its holding last year, and on March 26, 2008 sold its remaining shares - at 60p per share, for GBP 28.4 million, compared with the GBP 103 million it was valued at following the IPO. In a classic case of thieves falling out after the big haul, Merrill Lynch gave no warning of its plan to dump the shares to its erstwhile buyout partners - both of whom retain seats on the Debenhams board. According to the Financial times, the Merrill sale "came as a shock" to TPG and CVC.

The real lesson, buried in the FT article, is this: "Merrill - along with the other buy-out firms - has made a handsome return on the investment regardless of the share price performance following the float [our emphasis - IUF] The three private equity firms made more than three times their collective initial £600m equity investment in less than three years." Company shares fell by 17% immediately following Merrill Lynch's exit.

Now is a good time for someone - say, the UK Venture Capital Association, or TPG chief David Bonderman - to explain to Debenhams' workers the familiar virtues of a leveraged buyout: longterm investment, superior management and better alignment of the interests of management with investors.