Uphill battle for Noni B


noni bThe private equity takeover bid for Noni B looks to be a high risk play with auditors warning the fashion retailer is in danger of collapsing.

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BDO, auditors for the listed fashion chain, have indicated Noni B may be unable to continue as a going concern if the Alceon $16.4 million takeover was to founder.

Noni B booked a $7.8 million loss for the financial year ended June 30, 2014 comprising a trading loss of $2.3 million and writedowns of $5.4 million after a reporting a 7.7 per cent slump in sales from $121.5 million to $112.1 million.

The slide in sales was particularly severe in the second half, when revenues fell 13.3 per cent, forcing a review of the business, including its portfolio of 212 stores nationally.

Warning of a substantial loss ahead of the close of the 2014 financial year, directors of Noni B indicated that ownership options were being explored.

Alceon, a private equity firm run by Richard Facioni, formally launched a 51 cents a share bid for Noni B last month, an offer recommended by directors of the fashion retailer and accepted by the founders of the chain, the Kindl family, which holds around 40 per cent of the issued shares.

Alceon initially indicated it would require 90 per cent acceptance from investors for its bid, but has since retreated from that condition, after a spoiling shareholding of around 12 per cent of shares was secured by Gannett Capital, a company associated with the Smorgon family.

While indicating it will not make its bids conditional on the 90 percent acceptances, Alceon has warned that any minority shareholders retaining their shares may be required to participate in capital raisings to inject capital into the struggling fashion chain.

Shareholders remaining with Noni B could certainly be in for a white knuckle ride, given the current circumstances of the business, with auditors warning about its viability without additional capital investment and Alceon’s proposed related acquisition of the loss making Universal Brands.

Alceon is keen to acquire Universal Brands’ Queenspark and Events chains to consolidate the operations of both it and Noni B.

Alceon has indicated that it plans to inject around $2.3 million into Universal Brands to recapitalise the business and secure further funding to pay out $3 million in loans provided to Noni B by the Kindl family.

The funds to support the recapitalisation and debt retirement are likely to rely on borrowings from third party lenders, creating a significant debt exposure for Alceon on its venture into fashion retailing.

Uphill battle

Apart from the debt levels, Alceon faces an apparently difficult task in rebuilding the sales and profitability of three retail brands that are all losing money.

The private equity firm has recruited Scott Evans, former Bras n Things CEO, to lead the turnaround.

Gannet Capital opposes the acquisition that would see Noni B delisted, and argues that the United Brands chains will contaminate the 212 store Noni B chain, but is also unconvinced about the capacity of Alceon to rebuild sales and profitability.

There is certainly some justification for doubts about Alceon’s prospects in turning around the Noni B, Queenspark, and Events chains, as the track record of private equity in fashion retail is hardly impressive.

Colorado Group collapsed under private equity control, while Witchery and Mimco were sold by Gresham Private to Country Road at a bargain price despite the success of Gresham in expanding the store network and categories.

Most private equity firms have stayed well clear of fashion retail because of the seasonal influences on sales and unpredictable fashion trends that often require heavy discounting, writedowns on inventory, and clearances.

The firms are also wary of the level of competition in fashion retailing and have noted the difficulties encountered by many established and prominent brands, including Fletcher Jones, Portmans, Sportsgirl, and Rivers.

Alceon’s strategy appears to develop a multi-brand fashion retailer that could be sold to a trade buyer or listed on the Stock Exchange once a turnaround is achieved, potentially in a three to five year timeframe.

There has been significant consolidation of fashion chains through Premier Retail, Sussan Group, Specialty Fashion Group, Country Road, and the recently floated PAS Group.

Some of the consolidation in the fashion category has resulted from difficulties for chains in achieving sales and earnings growth or in accessing funds for expansion, but Alceon faces a more challenging task in bringing together three retail brands that are losing both money and marketshare.

Inside Retail PREMIUM understands Noni B has been adversely impacted by outdated technology systems, and by retaining underperforming stores in the hope that consumer spending would return them to profitability.

Started by the Kindl family in 1977, Noni B’s problems started when the company unsuccessfully tried to rollout a second brand (Liz Jordan) and have been exacerbated by the downturn in consumer spending and competition from international retailers entering the market and the response to those new entrants by local competitors, including the department stores.

Alceon has effective control of Noni B with a 19.9 per cent shareholding, as well as the 42 per cent holding of the Kindl family, but its plans could be slowed, if not derailed, by minority shareholders such as Gannet, which could conceivably mount a legal challenge over the takeover documents.

For the Kindl family the takeover is a bittersweet proposition as they quit the business they built with a much lower return than could have expected two to three years ago, but with a return that BDO as auditors might suggest would be at risk if the takeover were not to proceed.



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