November 5, 2012

Horse-trading at Douglas Holding on Advent bid

Douglas perfumery outlet (photo: LZ-Archiv)
Desired fragrance: A Douglas perfumery in Germany
Nine months after the confirmation of takeover talks, Boston-based private equity firm Advent International Corporation has presented itself as a potential buyer of Douglas Holding AG.

Shareholders in the German “lifestyle” group have till December 4 to accept a bid price of €38 per share.

This represents a 42 per cent premium on the undisturbed (four-week volume-weighted) share price before takeover rumours surfaced in mid-January.

Enough to satisfy the punters?

Advent can already count on the stakes held by three big shareholders amounting to 50.5 per cent. These include Oetker (25.81 per cent), the Kreke family (12.73 per cent) and Erwin Müller (12.01 per cent).

However, the bid is dependent on Advent obtaining at least 75 per cent of Hagen-based Douglas Holding, an Mdax-quoted Plc. The question is, of course, will they?

Binding and irrevocable

As the bid is termed “binding and irrevocable” Advent clearly doesn’t want to appear inclined to up the price at a later date.

At least this would tally with the Americans' optimism. Despite making the deal in the busy pre-Christmas season, they are confident that it can be concluded by the beginning of January at the latest.

Some analysts regard the bid price as “underwhelming”. They also point to recent statements by Ranjan Sen, Advent’s Frankfurt-based General Manager, and Douglas CEO Henning Kreke. These emphasise the growth potential of the holding’s “Christ” jewellery stores and “Douglas” perfumeries.

“Shareholders must now decide whether they will accept the offer, gamble on a later squeeze-out, or wait patiently for five to seven years until Advent’s investment fructifies,” says Christian Hamann. The Hamburger Sparkasse analyst puts the chances of the deal coming off at only fifty-fifty.

The balance is held by two major shareholders: Swiss private bank Sarasin (9.47 per cent) and the Eklöh family. The numerous members of the Eklöh clan are estimated to hold a total of around 15 per cent.

Sarasin, which sold a small part of its stake recently for around €37.5 per share, seems to view the deal dispassionately. Emotions within the Eklöh clan, however, would seem to be more complex. To understand these one must first digress a little into German retail history.

Eklöh and the Krekes

By acquiring the “Hussel” sweet shop chain in 1963, Herbert Eklöh laid the foundation stone of the future Douglas Group. Later, Eklöh transferred management to his illegitimate son Jörn Kreke.

Today, 72-year-old Dr. Jörn Kreke is Chairman of Douglas Holding’s supervisory board and was due to step down in March next year. His son, Dr. Henning Kreke, is CEO.

This could all be a game of happy families if the Kreke-Eklöh house were in full agreement. It would seem, however, that some of the Eklöh family support the Krekes and some do not.

The disgruntled feel excluded from a say in the running of the company. They also resent suggestions that the Krekes have been the sole authors of dynastic success.

Meanwhile, Beauty Holding Three AG, the new holding company based in Hamburg, would give Advent an overwhelming majority of 80 per cent.

Although Advent stresses that it does not wish to interfere with the Kreke family’s running of the company, it would clearly have the whip hand.

Troublesome Müller

So the Krekes, used to ruling the roost with only a minority stake, will have jettisoned troublesome shareholder Erwin Müller for a new and relatively unknown master.

It is to be doubted that they have bought themselves as much time as they perhaps think. Options at the company with annual sales of €3bn are not endless.

In a deal which, depending on how you do your maths, could range from €1.3bn to €1.8bn Advent plans to finance approximately €850m with outside capital (a senior syndicated loan and a mezzanine loan minus a revolving credit line).

The bidder "intends to adjust the debt capital to an efficient level". This could increase indebtedness at the new company. Although such a procedure is standard private equity practice, it is hard to see the maths adding up.

If Douglas Holding net margins were under pressure before, how will cash-flow be improved when a substantial amount of extra debt needs to be serviced?

Of course, Advent could try to sell various group divisions, but Henning Kreke has already stated that, together with Advent, he plans to "develop Douglas Group based on past portfolio strategy".

Bugbear Amazon

Given the success of Amazon, Kindle and the internet, it is hard to imagine who would want to buy troubled book store subsidiary “Thalia” in its present form.

Admittedly, there is potential for an increasingly focussed internationalisation of the Douglas perfumeries and Christ jewellery stores, but this is partially belied by past retreats.

Alternatively, Advent could follow Stefano Pessina’s and KKR’s lead at Alliance Boots and embark upon a round of international mergers. Would, however, LVMH subsidiary Sephora or A. S. Watson subsidiary Marionnaud etc. really be interested? And would Advent’s fund holders have the patience?

At the end of the day, perfume, jewellery, sweets, book and fashion stores remain somewhat artificial bedfellows within a self-styled “lifestyle” group. Will not the centrifugal force of markets throw them apart eventually – with or without Advent?


Related articles in German: Lebensmittel Zeitung, no.s 42 & 44, 19.10.2012 viz. 02.11.2012, by Jan Mende & Martin Mehringer 


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