Analysts predict major expansion in US and globally but deal could be start of Sir Philip Green’s exit strategy.
Sir Philip Green’s decision to sell a 25% stake in Topshop and Topman to US private equity firm Leonard Green & Partners is a savvy move - although questions have been raised as to why outside investment was needed.
The deal, which was revealed this week, marks the first time an outside investor has taken a slice of Green’s Arcadia empire.
But the move gives Green a double whammy when it comes to his ambitious plans for global expansion.
Firstly the capital raised from the deal - which as Drapers went to press was expected to be about £190m - is being used to fund that growth. The business is looking to move into new territories relatively quickly, with Green confirming only last month that China was “on the agenda”, as is Asia more generally.
Having opened his first store in South Africa in November, that country is also ripe for expansion.
But it is the US that Green seems most excited by, and it is understandable given the retailers’ initial success there.
Topshop’s third major US store opened this year in Las Vegas, and a Los Angeles shop opens next spring. In July, Green struck an agreement to open Topshop and Topman departments in 14 of Nordstrom’s department stores.
The wholesale arm has also been a success - New York cult indie Opening Ceremony is among Topman’s stockists.
So the appetite among US consumers for Topshop and Topman has already been tested. What Green now needs is the understanding of the market that comes with being a local business.
That’s where Leonard Green & Partners comes in. Not only has it a proven track record of investing in retail and brands - J Crew for example - it knows the US in a way Green and the rest of the team at Arcadia don’t.
Retail analyst Matthew McEachran, of Singer Capital Markets, told Drapers: “If you work with local partners you give away some of the value but having a local partner that has local knowledge of the property market, for example, can help.”
However, he raised a question mark over the need to fund expansion through outside investment.
“The missing part of the equation here is why the optimum expansion can’t be achieved from [Arcadia’s] cash flow and current relationships,” he said.
“The suspicion is that the company can actually fund its own expansion, although we know other parts of Arcadia aren’t doing as well.”
John Stevenson, retail analyst at Peel Hunt, said “a US backer should give you a lot of expertise”, but agreed other questions could be asked of the move.
“This is a reasonable opportunity for [Green] to start to divest his portfolio,” he said. “Because it is Philip we assume there is no exit strategy but he will have to exit at some point and maybe this is the start of that.”
Leonard Green & partners - the inside track
● Founded in 1989
● Invested in 62 companies
● Raised more than $15bn (£9.3bn) of private equity capital
● Invests in “established companies that are leaders in their markets”
● Part-owns US casualwear giant J Crew with private equity firm TPG Capital