Privateers ready to cash in chips

On the face of it the equity investors, including the private equity groups TPG and Blum Capital with the Myer family and senior management, have staged a turnaround in a business that had been a chronic underperformer for years.

They acquired the business for $1.4 billion back in 2006, which included putting in $500 million of equity.

In classic private equity style, the business was quite heavily geared (more than $850 million in debt including notes) and the buyers repaid themselves out of the proceeds of property asset sales the next year.

Having completed a large part of the grunt work required for a turnaround, it appears they have decided it's now time to cash in their chips and take the real profit.

It's a bit earlier than the company had officially scheduled. Yet within the industry there has been a view that the timing around churning this business would be more heavily governed by market and performance factors, which would influence maximising returns for the owners.

When Myer upgraded its full-year profit guidance in mid-June, investment banks started to salivate at the possibility that the IPO could be close.

Yesterday Myer suggested its fourth-quarter sales had been promising, which opened the window of opportunity for a sharemarket float before the end of this calendar year.

The success of Myer's arch competitor, David Jones, has also provided just the firepower Myer needed to boost the potential proceeds from the sale.

David Jones has recently upgraded its earnings numbers and is on the cusp of reporting strong sales for the quarter. It is now trading at near 15 times earnings before interest and tax and Myer would be hoping to float with reference to this.

Myer will presumably be looking to pay down some debt (perhaps about $300 million), after which it would have an equity value of, say, $1.9 billion and an enterprise value of about $2.5 billion. This is based on an expectation that full-year earnings will be about $250 million before interest and tax.

The timing would be additionally interesting, given how Australia's economic environment will pan out over the next year to 18 months. Retailers are keen to pronounce the end of the financial downturn. Since April most have seen a steady improvement in earnings  better than just about everyone had expected.

Last year's slump in consumer confidence has washed through the system. When this is combined with relatively strong employment and historically low interest rates, consumer confidence has rebounded and retailers have been early beneficiaries.

Yet both the Reserve Bank and the Government have warned of dangers on the horizon.

One such hazard is the potential for unemployment; another is higher interest rates. Both factors could retard the retail growth trajectory.

Yet the largest influence on the decision to float Myer sooner rather than later must be the exuberance of the sharemarket. Investors have been hungry for stock and the retail market loves to buy shares in icon brands such as Myer.

In a more subdued market, a company the size of Myer could seem less attractive to the institutional market. To attain a good price for the company in an IPO, Myer will need to demonstrate it has some more upside potential. It's less attractive to invest in a mature business when all the turnaround potential has been sapped by the sellers.

TPG has to leave something on the table. It will need to demonstrate a growth strategy that goes beyond rising with retail sales and just capturing better margins.

As such, the market will need to be confident that the management team will be in place for a while to come. The executive chairman, Bill Wavish, will not be taking the company to the market and Howard McDonald will become the new chairman.