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Deals or no deals?

New capital gains tax rules, the credit crunch and a slowdown in consumer spending will have a big impact on the prospects for selling businesses in 2008.

Private equity finance has driven the fashion retail sector over the past four years and late last year there was no let-up. In the run-up to Christmas the private equity sector was especially busy. Handbag brand Radley, lingerie business Agent Provocateur, discount operation The Original Factory Shop, young branded fashion chain Bank and footwear brand Hotter Shoes all changed hands or received new funding.

The number of deals surprised some industry watchers who expected a slowdown in acquisitions, with lending drying up due to the effects of the credit crunch caused by a crisis in the US sub-prime mortgage sector.

But the reality is that small- and medium- sized deals have remained pretty buoyant. So far it’s just been the mega deals such as Sainsbury’s that have failed to materialise.

HgCapital bought Americana, which includes fashion brands Bench and Hooch and branded fashion chain Westworld, from private equity business Isis in March last year. Although that deal was completed before to the credit crunch, Richard Mathews, HgCapital’s director of consumer and leisure, says he expects to see more deals in the sector in the first quarter of this year due to the changes in capital gains tax which take effect on April 6.

“Any deals that were pencilled in for the first half of 2008 are more than likely to get away in the first quarter because if you own a business sold before April 6 you will pay 10% tax on your capital gain, rather than 18% after that date,” Mathews says.

Mathews believes that as this legislation will be an artificial driver of deals early in the year, we can expect to see activity slowing in the second quarter as finance houses take stock of the market and reassess valuations.

“The biggest issues are going to be around price and what people will be prepared to pay for businesses going forward, given the deteriorating outlook for consumer spending and the lower levels of debt you can build into a private equity deal due to the banks being less willing to finance big debt packages.”

Deals that once attracted valuation multiples in double digits of EBITDA are likely to be back down to single digits in 2008. One source said that sellers of businesses have to “get real” and understand that in 2008 businesses will no longer sell for 12 times earnings, and they should be looking at accepting multiples of eight times earnings and lower in today’s radically different trading climate.

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