The fashion industry has not been a happy hunting ground in Australia for private equity. 

Indeed, there have arguably been more private equity plays in the local retail market that have proved to be duds than winners. Think Myer, Dick Smith, Repco, Redgroup Retail, Godfreys and Colorado Group. 

For the most part, private equity firms have not been enthused by the risk factor of the fashion category, although Navis Capital had a relatively successful investment in Retail Apparel Group, which it divested in a trade sale last year to the South African-based Foschini Group. 

However, it now seems Anchorage Capital Partners has an appetite for a fashion play after approaching Specialty Fashion Group (SFG) with a $100 million offer for two of its brands.

Anchorage Capital Partners achieved the deal of the century when it bought the Dick Smith chain from Woolworths and floated it on the Australian Stock Exchange for a $520 million payday a year later. 

Encumbered by high levels of debt, Dick Smith collapsed in 2015, two years after it went public.

Anchorage Capital Partners is now apparently testing its fashion sense with its move to buy the City Chic and Autograph chains from SFG.

The private equity firm had hoped to obtain agreement on the transaction by last week, but Specialty Fashion Group director’s were still mulling over a number of issues and conditions attached to the offer.

On the surface, the offer looks attractive as the $100 million purchase price is over $30 million more than the entire current value of SFG after a freefall in its share prices last year.

The retailer, which also owns the Millers, Rivers, Crossroads and Katies brand, has to weigh up the merit of selling the City Chic and Autograph chains to Anchorage Capital Partners against other expressions of interest it has received, while undertaking a comprehensive business review.

One of the offers for the group has been lodged by a consortium that includes former CEO, Gary Perlstein, who remains a significant shareholder.

Noni B has indicated an interest in SFG and it is understood two other private equity firms, Crescent Capital and Allegro have also flagged an interest in a deal. 

The interest in SFG is not surprising given that its current share price could make it a bargain buy with lots of upside if the business is ‘right-sized’. 

Directors of the multi-brand retailer have already decided to close up to 300 of the 1000 stores it operates in a bid to improve productivity and profitability. 

The business review has yet to determine whether shareholders would benefit more from a change of ownership or divestment of any of its brands; or from an equity injection that would enable internal restructuring and possibly repositioning of its middle market brands. 

The interest of Anchorage Capital Partners, Crescent Capital and Allegro is thought to have been created by the share price plunge in the past 12 months, but also the prospect of another fashion category opportunity. 

Sussan up for grabs?

Naomi Milgrom’s Sussan, Suzanne Grae and Sportsgirl chains have been informally on the market for the past 12 months and the investment bank Citi is reportedly now sizing up a formal sale process. 

It is understood a trade sale is preferred to a float on the Australian Stock Exchange in the current economic conditions but there are arguably few potential local buyers.

Sussan used to have a marketing slogan, ‘This goes with that’ and therein is both the dilemma and the opportunity for the sale of the Sussan group, which IRW understands has had relatively flat sales growth in recent years but solid earnings.

While there could be interest from overseas buyers, especially Chinese investors, Sussan would potentially fit with Noni B or Solomon Lew’s Premier Retail albeit Lew’s fashion brands are not as buoyant as the expanding Smiggle and Peter Alexander chains.

However another ‘this goes with that’ option could be a private equity play that would put together the stable Sussan group with the entire Specialty Fashion Group or, more specifically, the City Chic and Autograph brands.

The usual private equity playbook frequently involves acquisitions of two or more companies in a category that can be successfully integrated to generate synergies that boost the bottom line.

The big payoff for private equity is if it can restructure and revitalise businesses that are not trading to well, however, there can also be a handsome return if the investor can boost profitability by increasing the scale of the enterprise and maximising synergy benefits.

Private equity firms usually maintain an investment for around five years which could allow an opportunistic investment of fashion brands in the current market to capitalise on an upward swing in retail trading or on a resurgent share market appetite for retail stocks.

Milgrom’s private company has around 500 stores across the Sussan, Suzanne Grae and Sportsgirl brands.

The expected price tag for the business is estimated to be between $200 million and $400m but would be dependent on the health of the store network and the ability to exit underperforming stores that are dragging down profits.

The value of the Sussan Group could also be influenced by the ‘this goes with that options’ available and certainly City Chic and Autograph could be a relatively snug fit with Milgrom’s brands if they can be prised away from SFG.

The $100 million offer from Anchorage Capital Partners, which is presumably still on the table despite the missed deadline for a decision last week, would certainly assist SFG in its restructuring and potentially help fund early exits from locations with heavy losses.

However, that opportunity needs to be weighed against the value of those two brands in any recovery strategy for SFG.

As some shareholders in SFG have noted, it is hard to properly assess the $100 million offer for City Chic and Autograph because the retailer does not breakdown trading results for each brand.

Shareholders do see the Anchorage Capital Partners offer as proof of the value within SFG despite its current nadir.

Directors of the company have promised to keep shareholders informed on the progress of the business review but have noted that shareholder approval for the sale of parts of the business would not be required under corporate and bourse regulatory frameworks.

Never say never

While SFG is mulling over expressions of interest from prospective buyers, Myer shares reversed some of their recent losses after rumours circulated that David Jones was “running a ruler” over the department store group.

A merger of the two department store groups was a live prospect in 2013 when Myer approached David Jones’ board with a plan to boost flagging sales and earnings.

The plan was rejected by David Jones and scuttled the following year when the South African Woolworths company acquired David Jones.

Australian investors seem to maintain a faint hope of a life jacket involving a David Jones acquisition of the ever diminishing Myer, but their hopes would seem to be forlorn with the Woolworths parent company denying interest in a buyout.

While you can never say never, realistically a David Jones bid is most unlikely as Myer would require such a large amount of capital to fix at a time when David Jones still requires work in its own right to lift flagging results and the dubious value of buying an overblown store network that includes many clash sites.