Chapter 27

Debenhamsa

PRIVATE EQUITY GOES SHOPPING

It was October 23, 2003 as Philippe Costeletos enjoyed the California sun, but only from his hotel window. He was glued to the phone with his office back in London as the unexpected turn of events over the last few days required a swift and decisive decision from him now and could not wait for his return back to London.

Costeletos had joined Texas Pacific Group (TPG), one of the world’s largest private equity buyout firms, only 6 months ago but it was already starting to feel much longer. He had instigated TPG to team up with CVC Capital Partners and Merrill Lynch Group Private Equity to create an investment vehicle called Baroness Group, a consortium to target the buyout of Debenhams, one of the UK’s largest retail department stores. If they were to succeed, it would become a ground-breaking buyout deal and become, to date, the largest public company to be taken private in the U.K.

The race for Debenhams had started in February that year when Permira Advisers Ltd. (Permira), a leading European-based private equity firm, made its first offer. This was quickly dismissed by the board of Debenhams but Permira returned in early May on behalf of the newly formed Laragrove consortium with an indicative offer that the board could not brush aside. Costeletos recalled taking in this news a week before joining TPG and how he since had to constantly play catchup as he was late in joining the negotiations.

This was it, the final stage in the race for Debenhams. Did his team have the right offer price? Would they outbid their competition? After hours of deliberation, Philippe decided to give the go-ahead to announce a new offer for Debenhams, even trumping his own earlier offer made just a month ago.

U.K. retail sector

In 2003, the U.K. was enjoying a strong and growing economy. Personal disposable income (PDI) was on the rise and consumer confidence and employment levels were on the increase (see Exhibit 28.1). The real estate market was also seeing a boom with average house prices appreciating over 70% since 1999. These conditions were favorable for the retail sector fueling an increase in consumer spending activity. There were speculations, however, that 2003 was the peak and consumer spending was on the brink of a downturn. Interest rates were expected to increase and record high credit levels and increased mortgage payments were expected to start impacting consumer behavior. From late 2002, the retail sector in the U.K. was seeing increased change in ownership. Iconic U.K. retail executives such as Philip Green, Stuart Rose, John Lovering, Rob Templeman, and Terry Green, who all had prior track records in managing successful retail businesses, became active in a new wave of consolidation attempts (see Exhibit 28.2). Private equity houses were starting to team up with such renowned executives targeting stores that were household names.

The industry was now a prime target with room for consolidation, aiming to create operational efficiencies by consolidating costs such as advertising, purchasing, and head office administration functions. Some equity analyst reports were also claiming that the cash-generating sector was ripe for a shakeout as the effect of a prolonged stock market slump meant many store groups were trading at less than the value of the property, cash, stock, and goodwill they owned. They claimed there was a fundamental disconnect between the stock market values of the retail sector and their future business potential.

Most notably, the turnaround of British Home Stores (BHS), a U.K. fashion, furniture, and home accessories retail chain, led by Philip Green who acquired the store for £200mn in early 2000 and sold it for an estimated value of £1.2bn only 2 years later was setting the expectations for similar deals in the retail sector.

Debenhams’ department stores: History and growth up to 2003

By 2003, Debenhams’ department store chain was considered the second largest in the U.K. dominating almost a quarter of market share (see Exhibit 28.3A). As a result of recent aggressive expansion activities, it had 104 stores including 14 overseas franchise outlets in Europe, the Middle East, and South Asia (see Exhibit 28.3B).

Debenhams opened its first department store in 1905 in central London’s busiest shopping district, Oxford Street, where its flagship store still stands today. Its origins date back to 1778, but the name was first used in 1813 when the Clark & Debenham Partnership was established in London’s Wigmore Street, directly behind Oxford Street. The partnership had grown its business expanding retail outlets across the U.K. and even had its own clothing manufacturing operations.

In 1928, Debenhams listed its shares on the London Stock Exchange (LSE) trading as an independent company and continued to pursue an expansion strategy across the country. By 1985, it had department stores in 65 key locations across the U.K. and owned a number of other branded retail stores including Hamleys, the famous London toy store, and Harvey Nichols, London’s boutique department store for high-end fashion located near the exclusive Sloane Square, Knightsbridge, where the wealthiest Londoners were known to shop.

In 1985 Debenhams was acquired for £560mn by the Burton Group, a major U.K. retail conglomerate owning mid-range fashion retail store chains such as Topshop, Evans, and Dorothy Perkins. Under new ownership, the company introduced exclusive ranges of branded items and aggressively expanded, opening its first overseas franchise store in the Middle East in 1997.

Ownership under the Burton Group did not last very long, and by 1998 Debenhams was de-merged and returned to an independently listed company on the LSE.

Following the de-merger from the Burton Group, Debenhams pursued a strategy of sustainable growth improving their brand and customer proposition. With strong operating cash flow, it had expanded and modernized the store portfolio making significant investments in its core business. Debenhams enjoyed a strong presence in key product categories which included women, men, and children’s fashion, homeware, health and beauty, and accessories. By 2002, it had 22,000 employees and boasted a turnover of £1.7bn and pre-tax profits of £153mn (see financial statements in Exhibit 28.4).

Debenhams became known to consumers for its wide selection of products. It had an array of different brands including its own in-house branded goods, created by leading U.K. designers who were solicited to create product lines that were only sold in Debenhams’ department stores. This exclusive selection differentiated Debenhams from competing department stores and soon it was successfully marketing 55 brands which included 25 unique brands called “Designers at Debenhams” (see Exhibit 28.5).

An online shopping site was also introduced in 1999, one of the first to be offered in the U.K.

In addition to its major department store locations, Debenhams started opening stores called “Desire by Debenhams” in smaller cities with a targeted mix of women’s fashion, beauty, and accessory products. There were plans to roll out more of these smaller scale stores across the country.

Apart from its successful business growth, Debenhams had a large property portfolio as it owned most of its city center department stores. With a boom in the commercial property market, this was a major contributor for investors to eye Debenhams as a potential acquisition target, planning to unlock the value of the property portfolio.

Laragrove and its first-mover advantage

Permira made the first approach to acquire Debenhams in February 2003. Its offer, however, was simply dismissed by the Debenhams’ board in early April, with Peter Jarvis, Chairman of Debenhams, commenting that the offer was “not serious”.

Undeterred, Permira returned under the guise of a consortium—Laragrove. It was a bidding vehicle set up with two other major private equity firms, the Blackstone Group and Goldman Sachs Capital Partners, the private equity arm of the global investment bank. Creating a consortium (also known as “club deals”) was becoming common allowing private equity houses to pool their funds and target larger companies.

Laragrove made its first indicative offer on the May 12, 2003 offering 425p per share. Debenhams’ stock price a week prior to the offer announcement was trading around 330p per share. The offer was pitched so far above the prevailing share price that the board of Debenhams had to give serious consideration to the offer.

Debenhams’ share price had fallen sharply in September 2000 where at one point it had plummeted to 190p per share due to a change of management. Terry Green, who had built up his reputation as Chief Executive of Debenhams for almost 9 years, departed to run another department store chain, BHS. Surprising the market, Belinda Earl was appointed as his replacement. She was relatively unknown, having joined the department store in 1985 making a slow ascent to the top job. Over the subsequent 3 years, her performance had proven stalwart and the share price had risen reflecting this (see Exhibit 28.6).

Seduction and misalignment of management interest

As part of its offer, Laragrove expressed from the onset its intention to keep Belinda Earl at the helm with her management team. This suggested that Laragrove already had the management team successfully aligned to their interests by guaranteeing they would remain in place with further financial gains. It was revealed that Belinda Earl (CEO) and Matthew Roberts (CFO) were guaranteed to keep their jobs as well as getting a 6.9% equity stake in Debenhams. In addition, it was estimated that Belinda Earl would be guaranteed a windfall of £3mn if the bid was successful.

This led to immediate questions by the media regarding potential conflicts of interest for the management team and accusations of poor corporate governance. Belinda Earl was also accused of misleading the market as she had only weeks ago denied receiving any takeover offers when she announced positive interim results. Laragrove claimed that it had decided on its higher offer as a result of the announcement of the interim results but could not escape from being seen as having an unfair advantage.

Serious questions were raised by critics about Laragrove’s open access to the management team and having an inside track on the company by guaranteeing their job status. This was seen as a strong disincentive for any other bidders to approach the deal, perhaps denying shareholders the best possible price.

Increased commitment through inducement fees

By late May, Laragrove skilfully negotiated not only the management support but gained an inducement fee agreement in which Debenhams would have to pay a penalty fee to Laragrove if they turned down their offer. It was highly unusual for such an arrangement to be agreed at such an early stage of the bidding process and prior to any due diligence taking place. Traditionally, inducement fees (also known as breakup fees) were agreed on the eve of an official signature mitigating deals falling out so late in the process. It was primarily seen as a final sign of commitment from the seller to the buyer.

Laragrove secured the following commitments:

• 6mn would be paid to Laragrove if Laragrove was willing to make an offer of 425p per share and the Debenhams’ board was not willing to recommend such an offer; and
• 8.5mn would be payable to Laragrove if the Laragrove 425p offer was unsuccessful because a higher competing offer succeeded.

Laragrove was now ready to give its full attention to due diligence with the added bonus of securing the above financial commitments that would mitigate the costs of the process. Laragrove was in a strong position, not only with the inducement fees, but by having the full cooperation of both CEO Belinda Earl and CFO Matthew Roberts. In addition, there were no signs of any competition.

Searching for suitors

Laragrove was still the sole bidder for Debenhams in early June prompting the Debenhams’ board to set up a committee to oversee and evaluate the private equity bid while searching for other possible bidders. This was to be chaired by a non-executive director as it emerged that the chairman of Debenhams Peter Jarvis had also created a conflict of interest by entering into an agreement with Laragrove to receive annual pay of £220,000 should Laragrove succeed in its bid and should his role as chairman disappear.

The committee began a desperate search to get a proper auction process started in order to achieve the best value for the company. This, however, was an upward struggle for the committee as rumors were rife in the press that several firms had rejected entering the deal due to the established inducement fees and the close relationship between Belinda Earl and the Laragrove consortium.

Baroness Group and the race for Debenhams

Philippe Costeletos could not have joined Texas Pacific Group at a more timely moment (mid-May 2003). He was responsible for leading TPG fund investments in the retail sector. Costeletos thought Debenhams was such a high-profile deal that—should he decide to bid—he would be risking his reputation so early after joining TPG, and Laragrove was already steaming ahead in the process. Costeletos knew that he would need to act quickly.

Debenhams was in reasonably good financial health with decent operating cash flows and profitability margins. Sector analysts, however, were forecasting a gloomy outlook ahead predicting a downturn in the U.K. economy that would affect consumer spending. Across the Atlantic, the U.S. retail sector had not fared very well in recent years either. Costeletos immediately started exploring his options with Debenhams to see if he could identify additional value potential of the department store chain to justify a competing bid to the Laragrove offer.

A new management team

As a priority, Philippe Costeletos set out to identify some leading figures in the retail sector. In a timely fashion, TPG’s bankers Merrill Lynch brought his attention to John Lovering, Rod Templeman, and Chris Woodhouse (see Exhibit 28.7). The three managers had over 70 years of retail experience between them. They had worked together when Permira acquired Homebase, a major U.K. DIY store chain, and then teamed up again at Halfords, a hardware retail store chain mainly focusing on car accessories. The latter was an investment by a global private equity group, CVC Capital Partners (CVC). Costeletos liked the fact that the three key managers had previously worked with private equity firms. Furthermore, an additional candidate who knew Debenhams from the inside was identified. Michael Sharp was the effective number two and COO at Debenhams after it had de-merged from the Burton Group in 1998. He had built a solid reputation within the group as one of the strongest operators and had since become Managing Director of Principles, a U.K. retail fashion chain. Costeletos had now identified key executives to guide him through the intricate details of the retail sector and, more importantly, he had assembled the fundamental ingredients for a management buyin.

The Baroness Group consortium

As an unexpected side development for Costeletos, the management trio were also in discussions about the Debenhams deal with CVC. With the further addition of Merrill Lynch Group Private Equity, this soon developed into the creation of Baroness Retail Holdings Ltd. (Baroness Group), the consortium that would pool their resources together to compete against Laragrove.

It would, however, not be until June 29—well over a month after Laragrove negotiated an agreement for inducement fees and was lethargically involved in the due diligence process feeling confident in their solitary position—that Debenhams revealed they were in discussions with the Baroness Group, finally precipitating an expected bidding war.

TPG investment committee

In parallel with the creation of the consortium, Costeletos had to set the wheels in motion on his home turf, convincing the investment committee at TPG to support his mega-bid for Debenhams, his debut proposal upon joining TPG. Costeletos’ conviction for the investment in Debenhams rested on three major arguments.

First, he made the case that comparison of U.S. retail sector investments vs. the U.K. was misleading and the U.K. market was far more favorable as it was less competitive due to government regulations that restricted new land use developments and new store openings.

Second, Costeletos argued that the gloomy outlook for consumer spending based on general economic factors would not show a slowdown as material as that predicted by analysts. He did not believe that U.K. consumer spending would drop even in a downturn and predicted a growth of 4% to 4.5% over the following two years. This was considerably higher than the 2% to 2.5% estimates by leading analysts.

His third conviction rested with his new management team and their ability to create operational efficiencies and improve profit margins. Costeletos argued that the existing management of a public company would have a short-term quarterly view failing to improve long-term margins. While analysts were predicting a 13.2% EBITDA over the following two years, Costeletos argued that it would be 16.4% (see Exhibit 28.8).

He eventually won over the support of the TPG investment committee and gained approval to continue pursuing the investment opportunity in Debenhams based on the following investment thesis:

• Stable core store cash flows and property portfolio to provide underpinning value
• Significant upside in operating/central cost, CAPEX, and working capital
• Backing of aggressive new management team with demonstrable track record
• Growth opportunity in underpenetrated product categories
• New-store and new-format growth potential
• Not a turnaround: Solid base plus upside potential.

An inducement fee and commitment fee for Baroness Group

On July 18 Debenhams’ board conceded to a second and separate inducement fee agreement with Baroness Group. It was seen as an inevitable decision by the board in order to attract the Baroness Group as a second bidder. This was even more apparent by the agreement of a further commitment fee to pay Baroness Group for conducting due diligence. This was unheard of before in past private equity transactions and a novel and innovative feature which Baroness Group imposed on the board. Costeletos argued that this would at least stop Laragrove from bidding below the 425p offer:

“Before we entered the process, there was little incentive for Permira to revise its price … But given how far ahead the competitors were in the process, we couldn’t justify going out of pocket with the diligence costs, so we asked to be compensated for it. This wasn’t something that had been done before, but we felt it was the only way to move forward and as a result … added competitive tension to the sale process.”

—Costeletos’ comments to Buyout magazine, March 2004

The details of the inducement fee and the commitment fee agreed upon were as follows:

• Baroness Group would be paid £1.2mn per week over up to a 5-week period if it reaffirmed each week its “strong commitment”, having consulted with its legal and financial advisors, to continue discussions regarding an offer at a price above the level of any offer made by Laragrove or another bidder and if Baroness notified Debenhams before the end of September that they no longer wished to proceed with an offer for the company. This fee would only be paid if they decided not to bid.
• A fee of £8.5mn would be payable if Baroness Group made an offer at a price higher than Laragrove’s 425p per share but was deemed unsuccessful because a higher offer succeeded.

This agreement, which eventually was made public, drew criticism:

“It sets an unwelcome precedent to fund a venture capitalist group to do due diligence on your company and we are disappointed that the management felt they had to do this. If a venture capital company is seriously interested, they should not need to be funded, it makes management appear too keen to be taken over.”

—David Cumming, Investment Director, Standard Life, The Independent, July 29, 2003

Costeletos was relieved at achieving this agreement tipping back some of the imbalance from Laragrove’s head start while strengthening his position with the TPG investment committee. He also knew that the Debenhams’ board could not afford to lose the interest of Baroness Group in order to get an auction process started between the two contending syndicates; so, as controversial as it may be viewed, he thought this to be a fair deal. Baroness Group was ready to delve into the due diligence process, almost two months after Laragrove.

The bidding war begins

Formal offer from Laragrove, July 29, 2003

The Laragrove consortium made its formal offer to the Debenhams’ board on July 29, maintaining their earlier indicative offer of 425p per share. Laragrove committed £528mn in equity (arranged as ordinary income and deep discount bonds) with the remainder in debt resulting in a leverage ratio of 68% (Exhibit 28.9 provides the deal structure for Laragrove’s tender offer).

Laragrove also announced its plans for immediate refinancing post acquisition by setting up a mortgage facility for £160mn secured on Debenhams’ stores. Furthermore, they announced the planned sale and leaseback agreements with Legal & General, Ravenscroft, and Royal Bank of Scotland for £144mn, £22.4mn, and £145mn, respectively. Together these transactions would amount to £471.4mn. The U.K. property market was in the midst of a boom with prices appreciating quickly. In fact, the sale and leaseback offer was already higher than an estimate given by a property advisor earlier in the month.

Laragrove, in addition, pushed ahead by announcing the possible appointment of an iconic figure in the U.K. retail business, Stuart Rose, as non-executive chairman if their bid was to be successful.

The Laragrove offer was met with a lukewarm response from the Debenhams’ board, commenting: “(Laragrove’s offer) represents a proposal worthy of serious consideration in the absence of a higher offer being received.”

There was no summer holiday for Costeletos and his team that August. “It was down to the wire and an extraordinary experience,” recalls Costeletos and his team who barely slept for an entire week. They were busy conducting due diligence while in parallel configuring the financial structure of their offer, carefully planning between the three private equity firms, legal advisors, and then followed by intense negotiations with four different banks for the debt assignment: Credit Suisse, Merrill Lynch, Morgan Stanley, and Citigroup.

The financing was not dissimilar to that of Laragrove. The portfolio of property assets was the attractive part of the deal as Baroness Group had intentions to separate Debenhams’ retail activity and real estate into separate property companies as well. The plan was to “carve out” the property assets from the balance sheet through a sale and leaseback.

On September 12, Baroness Group announced its offer of 455p per share. It was offering £599mn in equity, yielding a slightly lower leverage ratio than Laragrove at 66%. The offer was also made with the option to switch to an unusual form of the Takeover Code called a “scheme of arrangement”.

Scheme of arrangement

Baroness Group wanted a quick resolution. It was conscious of the looming Christmas shopping months, a crucial seasonal trend in the retail sector, and did not want the auction process to drag its heels and impact the business.

Baroness Group introduced the option to switch to a scheme of arrangement where a decision could be reached much quicker. Typically, the scheme was used in distressed situations. In this uncommon use of the scheme, the panel on Takeovers & Mergers (Takeover Panel), an independent body that regulated and supervised transactions through the code of practice, became involved and mulled over the use of such a process as it would likely set a precedent for future bidding wars.

On October 13 the Takeover Panel set out the following ground rules for the scheme of arrangement:

After 5 P.M. on the 30th of October, should one party wish to place a higher bid, this must be lodged with the Panel Executive by 4 P.M. of the following day. At 5 P.M., this offer would officially be announced. The counter-bidding could continue daily in the same manner until the 3rd of November when the open auction process would come to an end. A final sealed bid would then ensue with the last offer to be submitted to the Panel Executive by 1 P.M. on the 4th of November. The highest bidder, thus new owners of Debenhams would then be announced on the same day at 5 P.M.

Final showdown: Laragrove vs. Baroness Group

Seventeen days after Baroness Group submitted its offer, Debenhams’ board announced its favorable view. Nevertheless, the deal was far from over with Laragrove still having the opportunity to counterbid. Costeletos was still not holding his breath.

Soon, news reached him that Permira, the lead investor in the Laragrove consortium had just successfully raised more capital through a staggering £5.1bn fund, one of the largest yet in Europe. This would enable Laragrove to increase its offer.

Adding even more fuel to the heated fire over Debenhams, the announcement of the financial results for the year ending August 2003 revealed stronger than expected business results. Actual turnover had increased by 7% and pre-tax profits were up by almost 10%.

Unfolding of the tender process

Expecting a counterbid any day now from the Laragrove consortium, Costeletos reluctantly boarded a flight bound for Los Angeles to attend TPG’s annual investors’ conference which he just couldn’t miss. The only thing going through his mind was how far Laragrove would be willing to go and by how much would it increase the offer. Some analysts were predicting that the final price would settle around 490p per share.

By the time he disembarked from his 12-hour flight, everything had changed, and the race for Debenhams had taken on a peculiar turn. Goldman Sachs Capital Partners announced its pullout from the bidding process delivering a severe blow to the Laragrove consortium. It felt that the auction process would hike up the price too high and it no longer wanted to remain involved. Rumors were, however, circulating that Permira, undeterred, was now in talks with another major private equity firm.

Costeletos and his team had to act swiftly. He wanted to deliver a surprise attack with a new bid even above Baroness’ own earlier offer. He knew this move would surprise both Laragrove and Debenhams. He also assumed that many Debenham shares were now in the hands of hedge funds and opportunistic investors waiting for the final deal to close and, therefore, would be happy to accept a higher price and lock in healthy year-end profits. The question was how high should the Baroness Group go?

Costeletos had now been glued to his computer and phone and has spent two sleepless nights liaising with his team in London. They at last had a new bid which hopefully would become the decisive knockout blow to the Laragrove consortium.

Finally, as he slowly placed the phone down, he was starting to sense the deal was within his grasp. Exhibit 28.10 provides the timeline for key events in the Debenhams’ bidding war. Exhibit 28.11 presents comparables for U.K. retail buyouts during the period.

POST DEAL AND GOING PUBLIC AGAIN

Debenhams Plc was eventually de-listed from the London Stock Exchange (LSE) on December 5, 2003 under the new ownership of the Baroness Group which invested £607mn in equity. At Debenhams, the prior management team was swiftly replaced by the private equity–backed veterans consisting of John Lovering (Chairman), Rob Templeman (Chief Executive), and Chris Woodhouse (Finance Director). Both the new management and Baroness Group embarked upon their post-acquisition plan under private ownership.

Releasing value from the property assets, Baroness Group immediately focused on the post-acquisition financing by separating the real estate assets and creating several new property companies away from the operations of Debenhams. It prioritized refinancing the higher interest rate bridge and mezzanine facilities with mortgages and high-yield bonds which offered more attractive rates (see Exhibit 28.12).

By April 2004, both the bridge and mezzanine facilities were paid back in full, replaced with a £370mn mortgage facility and issues of deep-discounted bonds. The ultimate goal, however, was achieved in February 2005 with a sale and leaseback arrangement with British Land for £490mn for 23 of their department stores. The cash flow from this transaction along with the proceeds from the disposal of 7 other properties released £125mn which became part of Baroness Group’s May 2005 dividend package.

Operational improvements

In parallel, the new management team implemented radical downsizing in Debenhams’ operation. Fire sales were held to clear old inventory off the balance sheet and to drastically reduce the stock of merchandise. More attractive credit payment terms were negotiated and the large number of small suppliers was cut to much fewer numbers, which reduced the time to market for new products from 18 weeks to less than 13 weeks (see Exhibits 28.13 and 28.14). By the end of fiscal year 2005, Debenhams was showing a negative working capital. Altogether, the new strategy improved operational effectiveness by transforming the supply chain and identifying new growth sources and areas for geographical expansion. New department stores were opened while less profitable ones were closed down. A new range of smaller concept stores—labeled Desire by Debenhams and aimed at women—were introduced (see Exhibits 28.15 and 28.16).

These operational changes markedly changed the business providing strong cash generation and improved EBITDA results. On the back of this success and with the property company sale and leaseback arrangements in place, Baroness Group was ready to recapitalize the business.

In May 2005, effectively a new leveraged buyout occurred whereby the old holding company, Baroness Group Holdings Ltd., was acquired by a new company, Debenhams Retail Holdings Ltd. by means of a share-for-share exchange. This acquisition and refinancing enabled Baroness Group to extract a £1.3bn dividend payment from Debenhams in a tax-efficient manner: £1,196mn was paid to the sponsor consortium and £84mn was paid to the management and employees. The original equity investment was reshuffled to the new vehicle in the same proportions as before by the consortium, and £1.82bn of senior term loan debt was raised. Because the senior note debt was moved farther away from the operational assets of Debenhams, the banks were taking on additional risk in issuing this debt while, on the other hand, preparing Debenhams for an eventual IPO.

Baroness Group achieved its plan to improve the financial and operational performance of Debenhams and, suitably, was approached by several underwriters in late 2005 on the grounds that it was a “good window for an IPO”.

On May 5, 2006, less than 3 years from being taken private, Debenhams re-emerged on the LSE with a share price of 195p where 57% of the company was floated with 37% of shares remaining with the private equity firms of the Baroness Group consortium and 6% with the management team. A further 5% was sold by the Baroness Group a couple of days later by exercising an overallotment option. Exhibit 28.17 portrays the post-IPO results on May 7, 2006. The IPO yielded handsome profits for CVC, Texas Pacific Group, and Merrill Lynch Private Equity, and was hailed as one of the largest private equity takeovers in the U.K.

Very few imagined that, in less than 18 months after this reverse LBO, the share price would drastically underperform dipping below 90p per share. Coinciding with the general furor and public scrutiny of private equity activity in both European parliaments and the U.S. Congress, the consortium members of the Baroness Group found themselves having to defend their business model and endure skepticism of the way in which they conducted themselves:

“We have been in (Debenhams) for over three years and we can be patient and stay in for a long time. If people came in looking for a quick return they may be disappointed. The question is how patient they are.”

—Costeletos, quoted in the Financial Times, August 6, 2007

a The case was co-authored with Andrew Strachan (LBS Sloan Fellow 2007) and Kay Nemoto (LBS MBA 2002). Thanks are due to Philippe Costeletos, Senior Investment Partner at TPG Capital (formerly Texas Pacific Group) and Richard Parry (LBS Sloan Fellow 2006) for their valuable comments and assistance.