ANALYSIS:BRITISH TYCOON Philip Green and private equity firms Texas Pacific, Permira and Alchemy are battling to buy out the debt of troubled Icelandic fashion empire Baugur, owner of high street chains Oasis, Coast and Karen Millen. The outcome could transform the Irish fashion market.
Heavily exposed to the meltdown in Iceland's financial system, Baugur is in play because between £1 billion (€1.28 billion) and £2 billion of its debt is held by the tiny island's newly nationalised banks.
Iceland's government wants to quickly sell down these liabilities, opening an opportunity for Mr Green to increase his already-sizeable share of the fashion markets in Britain and Ireland. Even if one of Mr Green's private equity rivals prevail, a sale of the debt could create painful ripples for Baugur's Irish landlords.
Well-informed analysts, citing severe strain in the Irish retail trade, say the Baugur companies may try to renegotiate their lease terms here if, as is likely, the new holders of their debt seek efficiencies from the business. With the volume of retail sales in Ireland declining more rapidly last August than at any time since 1984, the landlords' hands in such talks would not be strong.
Baugur's vast reach in Ireland and Britain can be traced to the ambitions of Jon Asgeir Johannesson, a 41-year-old entrepreneur who, in 1989, established a discount supermarket in Reykjavik's docklands with his father. From this small start, with the aid of copious debt from Iceland's banks, he built a fashion empire of huge scale.
Once a poster boy for Iceland's rapid economic expansion, his empire reached a tipping point in the last week when Baugur's debts were frozen by the Icelandic government. A keen rival of Mr Green's, he warned in recent days that Baugur's investments could fall "one after the other" unless it completes a deal with him. Selling off assets, even at "firesale prices", was better than letting them fail.
Such assets include a 35 per cent interest in department store chain House of Fraser - which has a big outlet at Dundrum Town Centre in Dublin. It controls Mosaic Fashions, the immediate parent of Oasis, Coast and Karen Millen and their sister brands Principles, Warehouse and Shoe Studio. Other investments include minority stakes in Debenhams, the department store chain which now owns Roches Stores, and in fashion chain French Connection. It also has a stake in Hamleys, the toy chain, which will open a branch in Dundrum next week.
The Mosaic interests alone had sales in the year to January of £87.4 million and sales in the six months to July of £43.5 million. This business recorded annual sales increases of 20 per cent in 2005, 2006 and 2007, but the growth has tailed off this year. Ian Galvin, the chairman of Mosaic's Irish unit, recently said he would be "very happy" if the company held sales steady this year.
Through a spokeswoman, Mr Galvin declined yesterday to comment on the battle for Baugur's debt and its possible implications for the company in Ireland.
However, sources with knowledge of the business believe the arrival on the scene of Mr Green or any private equity debt-holder could quickly result in the company putting pressure on its landlords for a review of rental terms.
This could mark a decisive change of course for the retail property sector, where upwards-only rent reviews have been the norm for many years. Given the requirement on them to pay down any new debt they take on, neither Mr Green nor any private equity firm would be likely to adopt a softly-softly approach in any such talks. "If he can squeeze them in the UK, he can do what he wants in Ireland," said one source with knowledge of Mr Green's style of doing business.
Given the scale of his operations here already, landlords might have little room for manoeuvre. His brands - including Topshop, Topman, Burton, Evans, Wallis and Dorothy Perkins - had annual sales of £68.5 million in the year to September 2007, the latest period for which figures are available. The vehicle that runs the Irish operation - Arcadia Group Multiples (Ireland) - had accumulated profits of more than £77 million.
In Ireland, at least, any assumption of effective control of the Mosaic assets by Mr Green would more than double the scale of his interests.
In Britain, such a coup would confirm Mr Green's pre-eminence in a retail trade suffering badly as a result of a big economic contraction. Having tried without success some years ago to buy out Marks Spencer, when the chain was at its lowest ebb, it would confirm his status as king-maker in the British retail market just as Mr Johannesson reaches the end of the line.
While Mr Green raced to Reykjavik last weekend in an attempt to capture a deal, the interest of Texas Pacific and other private equity houses suggests he will not now be able to take a clear run at the company.
But with foreign exchange all but ceasing to function in Iceland as the country tries to protect its beleaguered currency, a deal might not be done until a semblance of stability is restored in the Icelandic payments system.
In the meantime, both House of Fraser and Mosaic Fashions said yesterday that they have sufficient funding to meet their obligations.
"We would like to emphasise that House of Fraser has all the funding in place to operate successfully," the chain said.
"We have minimal exposure to the tragedy that is happening in Iceland. However, should any of the debt or the minority shareholdings in House of Fraser be put up for sale, we will examine it on a case-by-case basis."
In a statement, Mosaic chairman Derek Lovelock said the chain "does not require saving". "The business has sufficient funding in place to meet all foreseeable obligations . . . the board is examining all potential avenues to secure long-term funding."
Change, however, is afoot. How the chips fall in Ireland will soon be seen.
