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The climate of fear in the credit markets has claimed another victim.
An auction for fashion retailer New Look collapsed yesterday as potential buyers baulked at the £1.8bn reserve price.
Insiders tried to blame the “blip in the debt market.” But although this played a role (and it’s also much more than a ‘blip’, incidentally) the real truth is that the big players are just realizing what we’ve been pointing out for a while.
It’s a really bad time to be buying retail stocks…
New Look was bought by private equity groups Apax and Permira in 2004, who are now trying to offload the company. They kicked off the sales process in March this year, expecting to raise £2bn, says The Times. Three bidders got to look at the books in June, but bidding apparently dragged on with one source telling the paper that “bidders were unwilling to pay much more than £1.5bn.
Now, there’s no need to feel sorry for Apax and Permira – they’ve already doubled the £150m each they put into the original purchase “through two refinancings since they bought the company.” But this failure to sell doesn’t bode well for the sector’s future.
There were several reasons behind the collapse. First, and most obviously, there’s the beginnings of the credit crunch, which is getting into its stride following the problems at Bear Stearns’ hedge funds. With money getting tighter and lenders becoming more careful with the terms they give, buyers no longer have unlimited lines of credit to spend on any old retail chain that takes their fancy. For example, Permira and Macquarie have had to pull out of bidding for Australian retailer Coles due to “problems with raising debt.”
But it’s not just about the worsening backdrop in the credit markets. There’s also the question of who in their right mind would want to buy a UK-based fashion retailer just as interest rates are rapidly climbing, and consumers are carrying more debt than ever?
New Look’s business “is thought to have been affected by tough trading conditions” says The Times. Well, they aren’t going to get any easier – with interest rates set to rise this Thursday and for the foreseeable future, disposable income is going to be squeezed much harder before consumers get any relief. Bidders were also apparently unconvinced by the company’s plans to expand overseas, which are at “a relatively early stage.”
And New Look is hardly a trophy asset – you could make an argument for snapping up M&S or maybe even Top Shop for pure branding reasons, but New Look just doesn’t have the same cachet.
Potential buyers are just coming around to what we‘ve been saying for a while – buying into the retail sector ahead of a consumer downturn just doesn‘t make a lot of sense. Our share tipster Paul Hill has been growing increasingly concerned about consumer-related stocks in recent months.
In fact, just last month he wrote a long piece containing all the reasons why he reckons we’re heading for a serious correction. One of his key fears was that the private equity boom would end in tears – and it looks like that may be exactly what’s happening now. Subscribers can read the piece here: How to prepare for a market crash
Turning to the wider markets…
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In London, stocks ended the day lower, having moved between positive and negative territory in intra-day trading. The blue-chip FTSE 100 index fell 17 points to end the day at 6,590, although the broader FTSE 250 rose 6 points to close at 11,534. Tobacco stocks Imperial and British American Tobacco fell, as did pub groups including Enterprise Inns, following the introduction of the smoking ban at the weekend. However, it was a good day for miners, particularly Anglo American which rose over 5%. For a full market report, read: London market close.
Elsewhere in Europe, the Paris CAC-40 closed 27 points lower, at 6,026. Meanwhile, the Frankfurt DAX-30 was 49 points lower, at 7,958.
On Wall Street, stocks rallied yesterday as investors were reassured by strong manufacturing data and falling Treasury yields. The Dow Jones added 126 points to end the day at 13,535. The tech-heavy Nasdaq was 29 points higher, at 2,632. And the S&P 500 was 16 points higher, at 1,519.
In Asia, the Nikkei added just 3 points to end the session at 18,149, having given up most of its earlier gains. In Hong Kong, the Hang Seng was up by as much as 302 points, at 22,074.
Having closed at $71.09 yesterday, just off a ten-month high, crude oil futures were last trading at $70.92 a barrel. Brent spot had fallen to $73.41.
After gaining over 1% yesterday, spot gold had edged up to $657.50 this morning (for a fuller gold market report, see our investing in gold section). Silver, meanwhile, had fallen to $12.60.
Turning to the foreign exchange markets, the pound climbed as high as 2.0196 against the dollar this morning – just off a 26-year high – and was last at 2.0151 against the dollar and 1.4810 against the euro. The dollar was at 0.7347 against the euro and 122.46 against the yen.
And in London this morning, brewer Scottish and Newcastle warned that first-half earnings would fall as the wet weather hits beer sales. Rising costs, along with the impact of the smoking ban and reduced spending power amongst consumers, is making conditions increasingly tough for pubs and breweries. Scottish and Newcastle’s shares had fallen by as much as 2.5% this morning.
And our two recommended articles for today…
Why oil investors are looking for Chantal
– So far, subtropical storm Amanda and tropical storm Barry have both been pretty mild. But will the next designated hurricane, Chantal, also spare the oil and gas producers in the Gulf of Mexico? To find out why investors should be watching out for severe supply disruptions, read:
Why oil investors are looking for Chantal
Western markets are an accident waiting to happen
– Ten years on, it’s hard to believe the Asian crisis ever happened, says Merryn Somerset Webb. But the events of 1997 are a warning against investors’ current complacency. For Merryn’s take on what could prompt a crisis – and what the consequences would be for markets in both the West and East, click here: Western markets are an accident waiting to happen