Distress down under

Over the past year, there have been a number of distressed deals including some of the biggest names in US and UK retail. When Australian private equity firms Catalyst Investment Managers and Castle Harlan Australian Mezzanine Partners teamed up last week to purchase two distressed retail chains, they successfully brought the high-profile retail play to the land down under.

In the deal – which comes as the country’s private equity industry continues to come into its own – Catalyst and Castle purchased the flailing New Zealand-based Warehouse Group discount chain and the Sydney-based Miller’s Retail variety stores for A$212 million (€133 million; $156 million). The private equity firms plan to merge the two chains in order to better compete with the big players in the Australian retail sector.

According to the Sydney Morning Herald, both retail firms have posted large losses recently, but the match could play to each others strengths. Warehouse has reportedly made significant investment in its distribution centers and infrastructure, with system[s] in place to handle double its current sales volume. Miller’s, meanwhile, is in need of a good system to keep inventory on the shelves on its stores. After the merger, the new retail group will have more then 450 stores and more than $1 billion in estimated sales.    

The retail play has become a big business in the US, with private equity bidding wars erupting over distressed, brand-name chains like ShopKo and Goody’s Family Clothing.

Private equity firms Texas Pacific Group and Warburg Pincus recently closed their purchase of The Neiman Marcus Group, a $5 billion deal. The high-profile LBO joined the $6 billion Toys ‘R’ Us buyout by Kohlberg Kravis Roberts, Bain Capital and Vornado Realty Trust and the JW Childs LBO of Brookstone as one of the biggest 2005 private equity transactions in the retail space.

But some see trouble up ahead for the retail-minded LBO firms. The spectre of declining consumer spending numbers in Europe, particularly the UK, could wreak havoc on the sector, considering the high fixed costs found in the industry. A report from credit rating group Fitch’s Ratings released last week suggested as much, but was somewhat overshadowed by the news that private equity-backed UK retail group Debenhams had doubled profits as sales for the latest fiscal year hit the £2 billion-mark.   

Despite the possibility of declining sales – something that may create future turnaround opportunities – distressed groups in the US, Europe and now Australia will no doubt continue to shop for bargains in the retail sector.