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Rocky waters ahead for retail

Topshot NZThe chilly winds of the current economic conditions are blowing through the retail industry and shaping major boardroom decisions.

The economic headwinds have prompted Wesfarmers to abandon a planned listing on the Australian Stock Exchange for the Officeworks chain.

Retail Apparel Group has also opted for a trade sale rather than test investor confidence with a public float, an option that is understood to have also been evaluated by the Sussan Group.

While not actively canvassing a sale of its own volition, Specialty Fashion Group is also waiting on notification as to whether or not a takeover offer from a Middle Eastern investor will proceed.

Ownership changes are also in the wind for the United States retail brand, Gap, currently operating in Australia under a franchise agreement by Oroton Group and Topshop.

The British retail group, which owns the Topshop/Topman retail brands, is assessing the viability of the Australian operation, which has operated under a franchise agreement with Hilton Seskin since 2011.

Seskin, an experienced retailer who was the founder of Rebel Sports, called in administrators from Ferrier Hodgson after talks about the future of the brand with Myer management.

Myer has a 20 per cent interest in Austradia, the Australian franchise operation, which has nine standalone stores and 17 concession outlets in Myer stores.

IRW understands Myer and Seskin began a review of the Topshop/Topman business after it posted a $3 million loss for the first half of the current financial year.

Seskin has indicated the franchise model was unworkable for the Topshop/Topman retail operation in Australia.

The more likely outcome of the administration appears to be a rescue by Sir Philip Green’s Arcadia Group, which owns British retail brands such as Burton, Dorothy Perkins, Evans, Miss Selfridge and Wallis.

Arcadia executives have been dispatched to Australia for talks with the administrators, Seskin and Myer on the future of the local business, including the option of a restructure of the retail network to improve profitability.

The stores are continuing to trade while Ferrier Hodgson examines the financial position of the chain. However, Myer will be hoping for a quick resolution to the Topshop/Topman woes after the administration announcement sent Myer shares plunging to around 85 cents a share.

The announcement added to concerns about Myer shares prompted by an investor report that expressed a negative outlook on the department store group in the face of increasing competition from global retailers.

The dramatic fall in the Myer share price could prove tempting to Solomon Lew, who acquired a strategic 10.77 per cent stake in the department store group in April.

Lew noted he may buy more shares in Myer, but ruled out a takeover offer at that time, a position that could be tested by the current price and negative investor sentiment for the department store chain.

While Arcadia executives mull over options, including taking control of the Topshop/Topman chain, the management of Gap Inc is also reviewing the future of their Australian stores.

Oroton Group, the publicly listed retailer, has been discussing an exit from its licence agreement with Gap Inc after heavy trading losses on the six Gap stores trading in Victoria and New South Wales.

Oroton has struggled since the termination of the Polo Ralph Lauren licence and its short-lived relationship with Brooks Brothers, but is now seen as vulnerable to a takeover after its share price has dropped to a 30 year low.

RAG sold for $302.5 million

Mindful of the volatile share market and prevailing concerns about the retail sector, the Retail Apparel Group has opted to abandon a proposed public listing and is selling its business to a South African retail group for $302.5 million.

In a deal that is expected to be finalised early in the next financial year, the Retail Apparel Group will be acquired by the Foschini Group which has more than 3,000 stores across a portfolio of 22 retail brands that cover clothing, footwear, jewellery, sportswear, mobile phones and technology products and home stores.

Retail Apparel Group has 400 stores across a portfolio of five Australian brands,  yd, Tarocash, Connor, Rockwear and Johnny Bigg.

Private equity firm, Navis Capita, acquired a 75 per cent stake in RAG in 2011 and had been planning to float on the ASX later this year.

RAG has indicated it is currently recording double digit sales and earnings growth with investor presentations earlier this year, forecasting a profit of $36 million for the current financial year.

The Foschini Group will secure 100 per cent of the business with Stephen Leibowitz and company directors, agreeing to sell the 25 per cent of scrip that they own.

The Foschini Group has a physical presence in 31 countries across five continents but its most significant markets are South Africa, Namibia and the United Kingdom, including Ireland.

IPO on hold

Another retail brand that could change ownership in a trade sale is Wesfarmers Officeworks chain.

Wesfarmers had planned a $1.5 billion float of Officeworks but decided not to proceed with a listing amid concerns about volatile share market conditions.

Wesfarmers managing director Richard Goyder said the company had determined that a listing of the chain would not realise “appropriate value” in the light of current equity market conditions.

Officeworks was launched in 1994 by the Coles Group which, in turn, was acquired by Wesfarmers.

The chain has more than 160 stores and annual sales of around $1.9 billion, stocking in excess of 30,000 products for a consumer and business customer base.

Wesfarmers has not ruled out a reconsideration of a public float if equity market conditions improve, but is also open to a trade sale if it can attract a suitor willing to stump up the $1.5 billion at which the listing was pitched.

Analysts suggest Wesfarmers’ proposed divestment of Officeworks is designed to extract maximum value for the business ahead of an expected erosion of sales and earnings growth when the online juggernaut Amazon is fully establishes a physical presence in Australia.

Arguably, Officeworks is close to maturity and rather than being based on any fear of Amazon, Wesfarmers’ decision seems to be more firmly based on re-directing funds to its hardware business in the UK, which has stronger growth potential.

Unless a cashed-up suitor knocks on the door or the share market becomes more forgiving to retail floats, Goyder said Wesfarmers is happy to retain Officeworks and would only divest if it was in the interests of shareholders.

Sussan up for sale

Another retailer which is reportedly keen to attract a suitor for its 550 stores across Australia and New Zealand is the Sussan group.

ARJ Group, a private company controlled by Naomi Milgrom, is understood to be on the sale block.

The Sussan, Suzanne Grae and Sportsgirl brands generate annual sales of around $470 million and, while the business is profitable, sales growth has been relatively modest over a number of years.

ARJ is estimated to have a 9.3 per cent market share in its womenswear fashion category and, like RAG, offers a solid platform for an international retailer to enter the Australian market.

Milgrom, who bought the business from family shareholders in 2003 and subsequently added the Suzanne Grae and Sportsgirl businesses to the Sussan chain, is understood to be keen to pursue a trade sale rather than a public listing.

Business as usual at SFG

Specialty Fashion Group (SFG) remains uncertain of its future as a public company while waiting on a decision by the Qatar based investor, Al Alfia Holdings.

SFG has adopted a ‘business as usual’ approach, despite being unable to determine whether or not a $135 million takeover proposal from Al Alfia Holdings will proceed.

The takeover bid is currently in limbo due to complications related to probate assessments following the death of the father of Al Alfia’s sole shareholder.

There is also a potential stumbling block for the bid if the largest shareholder on SFG’s books, NAAH, refuses to sell its 20.2  per cent stake.

NAAH is an investment company owned by Cotton On’s Nigel Austin, and his Al Alfia’s 70c a share bids represent a healthy premium on the current trading price of around 42c.

Specialty Fashion Group operates 1,066 stores in Australasia, the United States and South Africa in a brand portfolio that includes Millers, Katies, Crossroads, Autograph, City Chic and Rivers.

Industry analysts are waiting with bated breath for the release of April sales figure later this week, with the latest month balancing out any distortion to March sales as a result of the timing of Easter.

While most analysts are not expecting a negative figure for April, growth is likely to be modest, adding to concerns about the valuations on listed retailers and growth forecasts.

JP Morgan has already cut its valuations on a number of leading retailers traded on the stock exchange, perhaps over-reacting to the Amazon market entry, but nevertheless recognising continuing bearish consumer sentiment and tight spending.

The retailers JP Morgan trimmed in share price value calculations included JB Hi-Fi, Harvey Norman, Myer and Super Retail Group

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