FASHIONABLY TRICKY

There have been some high profile deals in the fashion sector so far this year. What attracts private equity players to this thriving sector and what are some of its disadvantages?

Rival buyout firms Permira and The Carlyle Group have been battling it out for Italian business Valentino Fashion Group. Permira recently bought a 29.6 percent stake in the company, ousting Carlyle, in what is potentially the biggest private equity deal in the European fashion sector to date. At press time, Permira had entered exclusive negotiations to acquire a further 24 percent from the Italian Marzotto family, Valentino's next biggest investor.

It would not be the first high profile fashion deal of 2007.

Towerbrook Capital Partners bought iconic UK shoemaker Jimmy Choo in February from Lion Capital for £185 million (€280 million; $362 million). The deal was thought to generate a return of about 2.25 times the original investment for Lion. It was the second time that Jimmy Choo has been passed through private equity hands – Phoenix Equity Partners originally bought the business in 2001 before selling it to Lion in 2004.

So what attracts buyout firms to the industry? One London-based GP thinks that “the fashion sector has private equity pulling power because GPs can take on more debt in the deal – banks are happy for GPs to leverage against the brand.”

The same source also points out that the sector has tremendous growth potential in emerging economies: while it is quite saturated in western Europe and the US, it is underdeveloped in emerging markets, and this creates “fantastic” opportunities for the global expansion of the brand, he says.

However, fashion also presents some important difficulties that potential investors would do well to consider. Explains the London-based GP: “The fashion sector is a tricky one for buyout firms because of its cyclical and expensive nature – prices are very high right now and that can't last for much longer. Most GPs like to have one or two brands in the portfolio – it attracts investors – but more than this would be unwise right now.”

TERRA FIRMA REALISES £200M FROM THRESHERS DEAL
London-based buyout firm Terra Firma has realised £200 million (€292 million; $396 million) from the sale-and-leaseback of some of the property estate of UK offlicence chain Threshers. The chain owns various retail brands, including Wine Rack, and about 2,000 shops. Terra Firma bought Threshers in 2000 from Whitbread and Punch for £225 million. The business has since expanded substantially, buying 200 Unwins stores in 2005. Roger Whiteside, former managing director of online supermarket Ocado, leads the Threshers management team. Terra Firma recently withdrew its offer for UK health and beauty chain Alliance Boots, after KKR upped its bid to £11 billion. However, Terra Firma has completed the purchase of Pegasus Aviation Finance, an airplane leasing business, for $5.2 billion (€3.8 billion). It is the firm's second biggest deal to date behind its $8.8 billion buyout of German property firm Viterra in May 2005.

SOVEREIGN BUYS HEALTH SERVICES FIRM
London-based mid-market firm Sovereign Capital has bought Parallel Options, a provider of supported living care services to adults with learning disabilities, for £11 million (€16 million, $22 million). Sovereign is an experienced investor in the mental health care space – its previous investments include CHOICE, TRACSCARE, Alkare and Cascade Care Group. CEO Eric Millard will lead Parallel and Steve Huggett has joined as finance director. Founded in 1988, Sovereign has £450 million under management. It recently sold CMGL Group, a provider of outsourced claims and insurance management services, to Capital Group for £32 million. According to Sovereign, the deal generated an IRR of 260 percent and represented a return of 3.3 times the original investment.

GMT AND MID EUROPA EXIT INVITEL
Mid Europa Partners and GMT Communications Partners have sold Invitel, Hungary's second-biggest fixed line telecoms operator, to Hungarian Telephone & Cable for €470 million ($637 million). The two firms bought Invitel from Vivendi International Telecom for €325 million in 2003. Under private equity ownership, the business' EBITDA increased from €59.1 million in 2002 to €82.4 million in 2005. Mid Europa Partners invests in Central and Eastern European companies and has more than €1.1 billion under management. The firm, which has offices in London, Budapest and Warsaw, is currently investing its second fund, which closed in January 2006 on €650 million. The firm recently bought Baltic mobile operator Bité from TDC for €450 million. GMT Communications Partners invests in European companies in the communications sector and is based in London.

ECI DOES TWO DEALS IN TWO DAYS
Electra Partners, a London-based midmarket house, has bought ventilation systems manufacturer Nuaire from rival mid-market firm ECI Partners for £34 million (€50 million; $67 million). The deal generated an internal rate of return of 80 percent for ECI. ECI backed the £38 million management buyout of the business, which has sales of more than £40 million, from founder Brian Moss in 2004, buying a 78 percent stake. ECI has also bought UK healthcare software provider CliniSys from its management team for £61 million – just one day after the Nuaire exit. The firm introduced Ken Briddon, former chief executive of UK software business JBA, as chairman. ECI is based in London and Manchester and has more than £500 million under management. The firm recently sold Enviros, a UK environmental consultancy business, to Alfred McAlpine, a London-listed support services business, for £30 million. The deal generated a return of 2.6 times the original investment for ECI, which is currently investing its £255 million eighth fund.

ABN AMRO BUYS OYEZSTRAKER FROM HERMES
ABN AMRO Capital, the private equity business of Dutch bank ABN AMRO, has bought a majority stake in UK office supplies distributor OyezStraker Group from Hermes Private Equity for £41.2 million (€60.2 million, $81.6 million). Hermes will re-invest £7.8 million in the business, and management will also make a substantial re-investment. Hermes, which originally invested in the business in June 2004, is thought to have made a return of nearly three times and an internal rate of return of about 40 percent. Paul Southwell, managing partner at ABN AMRO Capital, said: “We competed in the 2004 auction for OyezStraker, so we have known the management team for a while. This time around, we beat a number of other private equity firms and some trade bidders.” OyezStraker is the UK's biggest distributor of office supplies, with sales of £190 million. It was founded in 1997 through a merger of two businesses called Oyez and Straker.

HG CONSOLIDATES RENEWABLE ENERGY PORTFOLIO
London-based Hg Capital has bought a portfolio of four wind farms in the Picardy region of France from German wind farm operator Enertrag for €69 million ($93 million). One is already in operation while the other three will be built in 2007. The mid-market firm's other wind farm investments include ReWind in Italy, Sorne Wind in Ireland, Tir Mostyn in Wales and Wind Direct in England. Hg recently bought German biogas company Aufwind Schmak for €50 million. The firm's renewable energy team is led by Tom Murley and closed the €300 million Hg Renewable Power Partners Fund in December. Founded in 2000, Hg Capital has €2.5 billion under management and has offices in London, Amsterdam and Munich.

VSS MAKES FIRST SPANISH INVESTMENT
US private equity firm Veronis Suhler Stevenson has bought a majority stake in Spanish mobile content provider Zed. Following its acquisition of UK rival MonsterMob in 2006, Zed is now the world's biggest business in the sector by sales. The business is still majority owned by its Spanish founders the Perez family and is backed by Spanish investment company Torreal and publishing business Grupo Planeta. VSS has owned several businesses in the media sector, including Yellow Pages Group, digital satellite broadcaster The Chart Show Group and German newspaper publisher Berliner Verlag.

WELLINGTON PARTNERS INVESTS IN MEDIA START-UP
Wellington Partners has invested an undisclosed amount in Munich-based online advertising network Adconion Media. The business' clients include advertising agencies, direct advertisers and online media owners. Before 2008, the business plans to open offices in France, Australia, Scandinavia, China, the US and Canada. Founded in 2004 as Euroclick, Adconion has offices in Munich, London and Los Angeles.

VCS INVEST $12M IN UK TELECOMS FIRM
A consortium of venture capital firms that includes UK-based Accel Partners, US-based Venrock Associates, Germany's Grazia Equity and Japan's Bridge Capital has invested $12 million (€8.9 million) in XConnect Global Networks. The business, which is headquartered in London, provides services to telecommunications companies. XConnect has also appointed Kaj-Erik Relander from Accel Partners and Natan Tiefenbrun, COO of XConnect, to sit on its board, which is chaired by Ohad Finkelstein.

AIG INVESTS IN ROMANIAN TELECOMS BUSINESS
AIG Capital Partners has invested €45 million in Romania's Digital Cable Systems (DCS) for a 42 percent stake. DCS is Romania's third biggest provider of video re-transmission services. The investment comes out of AIG's New Europe Fund II, which is dedicated to investments in central and eastern Europe, and which closed in March 2007 on €523 million. The fund's predecessor, the AIG New Europe Fund, closed in 1999 on $321 million. The Central and Eastern Europe team is headed by Pierre Mellinger and has offices in Warsaw, Bucharest and Budapest. AIG's previous investments in Romania's telecoms sector include Orange Romania, the country's biggest mobile phone operator. AIG and a consortium bought a 20 percent stake in the business in 1999 and made a four times return on the original investment when the company was sold to France Télécom in 2005. AIG Capital Partners is the private equity business of AIG Global Investment Group, which manages more than $687 million in assets.