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The credit crunch is a real deal breaker

Over the past few years, Drapers has been filled with stories of high-profile deals such as Fat Face, Jane Norman, Hobbs and TM Lewin.

But recently there has been a real slowdown in acquisition activity, partly driven by nervousness about the state of the economy. The credit crunch has reduced the ability of both companies and private equity houses to raise debt to fund deals, and the big £500 million-plus deals market has been hardest hit.

Last year, there was a widespread expectation that New Look and Peacocks would change hands, but nothing materialised. With raising finance becoming more difficult, private equity houses are having to get groups of banks to fund a deal, rather than just one. This spreads the risk and exposure to investments, but also makes the deal process difficult to manage.

Deals are also taking longer to complete as buyers and sellers wrangle over price. While buyers are not able to match the heady earnings-driven prices of the pre-credit crunch days, sellers’ price expectations have not adjusted accordingly. With no signs that the UK economy will revive in the near future, both corporate investors and private equity houses are looking further afield to make attractive returns.

Deals such as Kurt Geiger, Radley and Agent Provocateur are all at the premium/luxury end of the market, which is expected to prove more resilient in a consumer downturn.

The challenging economy may also present opportunities for corporate investors to pick up some bargains in distressed situations. Existing casualties include Ethel Austin, Interna穯nale and Stead & Simpson, and other retailers may sell up rather than fight it out in a tough market.

Olivia Gillan is director of retail strategy group PricewaterhouseCoopers

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