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Many people are keen to see the return of initial public offerings in Europe. They include capital markets bankers fed up with golf courses, startups, and of course private equity firms, waiting for an opportunity to monetize their assets.
Under pressure to free up their clogged portfolios, the latter will have to take extraordinary steps to secure deals.
Take the news that CVC, which owns 85 percent of beauty retailer Douglas, is set to be a buyer, not a seller, in the upcoming IPO. The private equity group, which acquired Douglas in 2015, is not just holding on to its existing shares. Alongside the founding Criqui family, which has retained a 15 percent stake, CVC will also invest €300 million of new funds in the company.
This is a result of high debt and fragile markets. Douglas needs to raise €1.1 billion to reduce net debt from 4 times EBITDA to a more reasonable 2.7 times. The more the better, the better too. Its debt costs a whopping 8 percent annually, and matures in 2026.
But breaking the ice in Europe's IPO market with such a large offering was a gamble. It therefore plans to raise a tranche of cash from existing shareholders, and cap the size of the public offering at 800 million euros.
Investors find an advantage in venture capital firms' determination to make an IPO successful. And Douglas in itself is a beautiful thing. Revenue, at €4.1 billion in the year to September 2023, is supposed to grow by 7 per cent annually, with EBITDA margin reaching 18.5 per cent.
Her patch seems reasonably protected as well. It has exclusive agreements to distribute high-end cosmetics such as Chanel and Dior, bringing it out of Amazon's shadow. While luxury brands have jumped onto platforms like Farfetch and Yoox Net-a-Porter to sell clothing direct to consumers, this is harder to achieve for lower-priced items like lipstick.
Any appeal to Douglas will depend on her valuation. It has few direct comparisons. It's worth big discounts to US beauty giant Ulta, which stands at 14 times EBITDA, and European retailers like Inditex, which stands at 12 times EBITDA. A closer peer might be eyewear retailer Fielmann – smaller, with slightly higher growth and margins – which trades at 8.3 times 2024 EBITDA.
On this basis, Douglas will receive an enterprise value of 6.4 billion euros. But investors, cursing CVC's strong desire to get the deal done, may demand a fair discount before snapping it up.
camilla.palladino@ft.com
Lex is FT's shorthand daily investing column. Expert writers in four global financial centers provide informed and timely opinions on capital trends and major companies. Click to explore
