The obvious conclusion to draw from today’s announcement from Pacific Brands is that the private equity players that were considering a bid for the consumer brands group back in January and February had a good look and walked away, deterred by what they had seen. Apparently it’s not that simple.
In January, Pacific Brands revealed that it had received an unsolicited approach – known to have been from the private equity giant KKR – about a possible acquisition of all of its capital. In February it said other enquiries had also been received and were being considered.
Today it said it had concluded that a definitive proposal for an acquisition of all of its capital was ‘’unlikely to be forthcoming in the near term". That keeps the possibility of a transaction open, albeit suggesting one isn’t imminent.
Apparently the discussions with the private equity groups hadn’t completely ended, but Pacific Brands had become frustrated with the lack of progress and the distraction the process was creating for its management.
The Pacific Brands response to the approaches was unusually open-minded. Even boards that engage with private equity tend to be somewhat defensive because they want to preserve their negotiating ability.
Pacific Brands, however, has experienced four years of painful restructuring with not that much to show for it other than its survival, which is in itself no mean feat given the condition the group was in when Sue Morphet was appointed chief executive in 2008 and embarked on a radical, even brutal, transformation program.
Despite the relative success of that program in rationalising a sprawling brand portfolio and the group’s production base and reducing debt from destabilising levels, the harsh environment for Pacific Brand’s key customers – the big discount retailers – and the waves the radical Kmart strategy of slashing the range of products on its shelves and driving volumes through aggressive pricing has imposed severe pressures on the group.
With no relief in sight within the near to medium-term, and a share price that had gone nowhere in recent years, Pacific Brands’ chairman, James McKenzie, adopted a very pragmatic approach to the overtures from the private equity firms, which proffered some gains for long-suffering shareholders.
That prospect of a takeover premium has now receded, albeit that it hasn’t completely disappeared. In the hands of a KKR, with global interests in businesses with retailing exposures and access to global sourcing arrangements, Pacific Brands could be ‘’warehoused’’ for a few years until conditions improved and then brought back to the market.
While the private equity firms apparently haven’t conducted formal due diligence programs, they have received a considerable amount of information on Pacific Brands’ businesses and its condition and prospects.
Perhaps they were deterred by the uncertain and unstable broader environment as much as anything they saw within Pacific Brands itself – it’s been no secret that despite the whirlwind of activity within the group in recent years it has been struggling to translate that into earnings stability, let alone growth, in the hostile environment for value-based brands. The private equity groups didn’t need access to the group’s management to know that.
The failure of a transaction to materialise from the prolonged discussions with private equity would normally generate concern within the market that Pacific Brands’ financial position had deteriorated to the point where it had scared the potential suitors away.
Pacific Brands was, however, able to reiterate its existing guidance for this financial year in today’s announcement. If it hadn’t, today’s sharemarket sell-off on the back of the announcement would have been far more savage.
While that guidance is relatively bleak – earnings before interest and tax and net profits are expected to be materially down – the full-year guidance of EBIT before significant items within a range of $125 million to $130 million is unchanged. Significant items are, as foreshadowed previously, expected to include $32 million of cash restructuring costs.
Morphet is persevering with her strategy of shrinking the brand portfolio and driving down costs, while reinvesting in her core brands and developing online and physical proprietary retail channels for those brands to counter the pressure being exerted on her margins by the major chains.
That’s a long-term strategy, and perhaps one that might be better suited to a company held outside the public gaze. For the moment, at least, Pacific Brands will continue its grind towards stability and eventual growth under the harsh scrutiny that a sharemarket listing ensures.