Nomura's retail investment banking team - effectively acquired from Lehman Brothers in 2008 - is taking advantage of a recovery in the UK's retail industry. Writer Edward Russell-Walling

The merger and acquisition (M&A) market hasn't exactly been fizzing, at least not in Europe, where the first quarter of 2010 was the most restrained in 12 years. But within this quiet landscape, some life has been stirring in the UK retail sector and the retail team at Nomura has been involved in a string of interesting transactions - many of them involving financial sponsors.

Nomura's dedicated retail team is, of course, essentially the old Lehman Brothers team, acquired in 2008 along with the rest of the failed firm's European and Asian investment banking business. As corporate brokers to the likes of UK retail giant Tesco, and with strong research and trading capacity, the team has given Nomura a presence it once lacked in this sector.

The team had upwards of £1bn ($1.5bn)-worth of transactions in the pipeline when Lehman collapsed but, like the rest of the firm, was literally off the playing field for the next four months. By the time they were up and running again, it was early 2009 and there was a deathly hush on the retail deal front. It was only as the year was drawing to a close that Nomura found itself acting as sole financial adviser to UK music retailer HMV Group's £46m acquisition of MAMA.

MAMA is the UK's second largest operator of live music venues. In January 2009, as part of a diversification drive away from retail dependence, HMV entered a 50-50 joint venture with MAMA, then called the Mean Fiddler Group. Nomura, one of HMV's corporate brokers, advised the company in that transaction and was joint bookrunner on a £25m cash placing to fund it.

With the joint venture going well, HMV was rocked by a hostile bid for MAMA last December by SMS Finance, the largest shareholder in AIM-quoted MAMA, made a hostile bid for that company last December. HMV wasted little time in securing MAMA management's recommendation of its own, higher offer. HMV paid cash, funded from existing bank facilities, and Nomura acted as its sole financial advisor.

Preparing IPOs

If that was an example of the defence of strategy, Nomura's next deal exemplified a more topical phenomenon - a would-be initial public offering (IPO) as lure for a sale to private equity. Nomura advised buy-out specialists Kohlberg Kravis Roberts (KKR) on its January 2010 acquisition of Pets at Home, the UK's largest retail chain specialising in pet food and accessories, not to mention pets. From a single shop opened in 1991, it has grown to more than 250 stores. It also runs 54 Companion Care veterinary surgeries in a joint venture.

The business has something of a history with financial sponsors. Bridgepoint bought it with a number of other investors from 3i in 2004, paying £230m. "Bridgepoint had the option to float the business," says Ed Matthews, Nomura's head of retail investment banking. "And of all possible flotations it was clear that Pets at Home would have had a home on the market. But it decided to run a classic dual track process, preparing for an IPO at the end of 2009 or a possible trade sale in the first quarter of 2010."

The trade sale option attracted a number of large private equity groups, generating a highly competitive auction. While certain other banks were financing more than one bidder, Nomura took the decision to act exclusively for KKR. "We realised how serious they were," says Mr Matthews.

The auction produced a price that was at least as good as the best estimate of any IPO proceeds, with the added advantage of certainty. KKR agreed to pay £955m for the chain, and Nomura, Calyon and Commerzbank underwrote £450m of debt finance for the purpose.

The company is seen as an attractive debt investment because of its capacity to pay down debt quickly. "Pets at Home is many times larger than its nearest competitor, which gives it the ability to drive higher margins and higher returns," says Ed Boyce, a retail specialist in Nomura's investment banking division. "With that business model, you can leverage without undue risk to the equity investment."

Acting exclusively

The team's glitziest deal was yet to come. This was the sale of high-end fashion website Net-a-Porter to Richemont, the Switzerland-based luxury brand stable. The Nomura team has a long track record in advising Richemont, including work (as Lehman) on the unbundling of its tobacco interests in 2008, and it acted as Richemont's exclusive financial adviser on the Net-a-Porter acquisition.

Net-a-Porter was founded in 2001 by Natalie Massenet, a one-time fashion journalist. Selling the most chic and most expensive designer label clothes, with dresses routinely costing £3000 or more, it has proved that online need not necessarily mean downmarket. The site includes a voguish magazine.

"It's like walking down Bond Street, Park Avenue and Rodeo Drive, all in your own living room," says Mr Boyce. "Natalie Massenet understood the media side of retailing. She didn't load the business with lots of cost, particularly avoiding significant advertising costs, and it has been profitable since 2005."

That profitability has improved during the recession, trebling at the pre-tax level in 2008, and doubling again last year, on estimated sales of £120m. Richemont, which owns brands (it calls them 'maisons') such as Cartier and Alfred Dunhill and fashion group Chloe, was an early investor and already held 33% of the business. Other investors included Ms Massenet and her family, Baywinds - a Venezuelan family entity, and numerous other individuals. Some were now looking for an exit.

Richemont was the obvious solution. "Unlike LVMH, which has a significant soft luxury business, Richemont doesn't have a brand that dominates in luxury women's wear," says Mr Boyce. "Net-a-Porter is a fantastic online platform that has developed into a luxury brand in its own right."

So Richemont began the process of acquiring the 67% of Net-a-Porter it did not already own. "Because of the large number of shareholders - up to 100 - we couldn't physically negotiate with each of them," says Peter Bell, a Nomura investment banker who specialises in M&A. "Unusually for a private company, an offer had to be made to all shareholders. There was also a desire, given the UK tax changes [a new 50% income tax band] that were coming, to go quickly."

Establishing value for a profitable asset is never easy, with vendors looking at what they think will be continuing upside after the transaction closes. "In a fast-moving environment, there's a risk that you'll never get the deal done, because everyone is clutching at the next month," says Mr Boyce.

With Ms Massenet taking the lead, investors representing 80% of the shares accepted the offer, which allowed Richemont to acquire the remaining minorities. It valued the business at £350m, and Ms Massenet remains a minority shareholder in the holding company set up to acquire her firm.

As the Pets at Home deal showed, private equity is coming back to life and showing considerable interest in retail. Most recently, Nomura advised private equity firm Charterhouse on the acquisition of Card Factory from its founders, for some £350m. The greetings card business began in the back of a van in 1993 and now has 430 stores. That too was driven by impending changes to UK income tax in the tax year starting last month.

The UK, of course, is not Nomura's only stamping ground, and it hopes to exploit its links to both East and West as the international retail industry becomes more globally interconnected. Mr Matthews believes that the quiet days are over, at least for now. With private equity interest in retail recovering, and a number of fast-growing brands becoming increasingly global, there will be both ownership changes and funding needs, he reckons. "And private companies still have quite a lot of debt," he says. "If things don't pick up, there could be consolidation opportunities."

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