Another Specialty Fashion investor backs equity raising after knocking back offer

Another Specialty Fashion investor backs equity raising after knocking back offer

Source: The Australian Financial Review.
By: Sue Mitchell.

Specialty Fashion Group’s largest institutional shareholder, Lazard Asset Management, is backing calls for an equity raising rather than a fire sale after knocking back an offer for its 13 per cent stake from a potential bidder.

It is understood that broker Wilsons approached Lazard on Thursday on behalf of a corporate buyer, offering to acquire its entire stake at the market price, but Lazard refused to sell. Wilsons confirmed it was buying, but not for a corporate.

Like minority shareholder Sandon Capital, Lazard believes the struggling apparel retailer, which owns Katies, Millers, City Chic, Crossroads and Rivers, should raise new capital to fund restructuring rather than agree to an opportunistic takeover offer or sell brands at fire-sale prices.

Lazard’s stance comes after Sandon Capital managing director Gabriel Radzyminski wrote to Specialty Fashion’s chairman Anne McDonald, suggesting that an equity raising would be preferable to an asset sale “at a sub-optimal price”.

Sandon, which owns about 3 per cent of Specialty Fashion, has canvassed a one for two rights issue at 20¢ a share, which would raise about $19.2 million before costs.

It is understood Lazard might be willing to support a one for one rights issue which, if pitched at Thursday’s price of 24¢, would raise $46 million and go a long towards helping the company exit onerous leases and refurbish stores.

SFG’s board effectively put the company up for sale last year, hiring Luminis Partners to review options, after reporting its third consecutive annual loss and after a mooted $135 million takeover offer from Al Alfia Holdings fell through.

SFG’s earnings before interest, tax, deprecation and amortisation have fallen more than 60 per cent since 2010, even though sales have been largely maintained, and the shares have fallen from $1.40 amid growing concerns about the company’s solvency.

December-half accounts showed the retailer had current liabilities of $20.5 million and bank funding was set to be cut from $40 million to $22 million.

Specialty Fashion is understood to have received approaches from private equity buyers and arch rival Noni B, which confirmed on Wednesday it was interested in buying the company or some of its brands. Noni B managing director Scott Evans ran Millers and Crossroads for five years and knows the business well.

However, Noni B’s major shareholder Alceon Group said it was not behind the attempt to buy Lazard’s stake on Thursday.

Former chief executive Gary Perlstein, who owns 9 per cent of SFG, has also been attempting to put together a privatisation bid or snap up the profitable City Chic brand with the backing of co-founder and 8 per cent shareholder Ian Miller and former director Geoff Levy.

However, it is understood Mr Levy, who now runs Monash Private Capital, is no longer involved in the privatisation attempt and, like Sandon and Lazard , would prefer to see the company raise capital than be sold off cheaply.

Sandon believes Specialty Fashion is now worth at least $90 million or 47¢ a share, based on a multiple of five times forecast EBITDA of $18 million, compared with its market value of $46 million.

Sandon believes SFH could lift EBITDA to between $25 million and $30 million by exiting loss-making stores, in which case it would be worth $125 million to $150 million or 65¢ to 78¢ a share.

However, sources said turning around SFG was a “big job” and would require significant cash, especially to fix the largest business, Millers.

“I’m sure the board would have asked themselves the same question (i.e., whether to raise capital) but if you go down that path and things don’t improve you’ll have even more unhappy shareholders,” the source said.

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