A start-up with the intriguing name of StoreFund has opened a $25m initial public offer that is marketing a focused investment concept of buying into unlisted and selected listed quality retailers.
The directors reckon that investors will like to invest in a wide range of retailers via StoreFund. The private owners of targeted companies (called 'investees') will welcome a fresh source of capital especially those wanting to lighten the load of funding growth.
The investment model has some of the better elements of recent floats along with fresh concepts.
StoreFund has a closed end subscription period but will pursue a growth strategy that will require further capital to be raised by the way of cash issues and intends to be an active manager. It will generally seek board representation but will not run its investee companies day-to-day.
Each investee business will be kept separate with its own board, management, performance culture, resources and strategy. This is a bit like Hellaby's approach to its investments.
The management company, North Head Management, has brought the highly performing BBQ Factory into the fold as Subsidiary No 1 and is talking to other prospects. The aim is to have a portfolio that reduces the risks associated with one particular company, trend or fashion.
StoreFund will buy at attractive private company valuation multiples and add value.
Will investors like the intention of investing in specialty retail? Probably. Retailing has driven a lot of the economic buoyancy in New Zealand for the past several years. The economic pace might be cooling but evidently some of the private speciality retailers are continuing to expand at highly attractive rates of growth.
Storefund chairman Alexander Toeldte says Storefund will invest in businesses that are generally inaccessible for the individual investor.
Toeldte says the board believes there is a "large and growing number of companies that will meet StoreFund's criteria and that the market may be further stimulated by the existence of StoreFund."
North Head and StoreFund director Leigh Davis told 'Headliner', that rather like the retail revolution that spawned the boom in supermarket retailing, there is a wave of change gathering speed in the specialty retail segment. "These companies have begun to generate strong cash flows for their owners. They tend to be good at one thing, have a big brand profile and national scale."
They tend to have high cash flows and matching dividend paying capacity. But the owners of private retail groups invariably encounter difficulties raising development funding or bringing in additional working capital.
"The owner has got the business to a certain size but to expand it further means that the claim on him personally will become too large. The personal guarantee risk reaches the point where he wants to do other things. He's already given way to a management team and his personal authority is diminishing. But sometimes he can't even find a buyer."
This might reflect the difficulty buyers have in valuing private businesses and trade buyer interest is variable because of the difficulties amalgamating brands and diverse businesses.
Davis told us he believes StoreFund will get a good reception from private brand owners.
And what makes a good retail target? During Storefund's roadshow, brokers were told the qualities sought are:
It's evident that StoreFund sees retail as an evolving category that keeps creating new investment opportunities. "Yesterday's manufacturer could be tomorrow's retailer. Yesterday's integrated business could contain within it tomorrow's standalone retail business." So StoreFund may invest in providers of goods and services that may lie beyond a traditional definition of 'retail'.
The investment universe for this company will include many privately owned and unlisted firms. They see most retailers as being too small to do their own IPOs so they have difficulties raising development capital.
There are five parts to the StoreFund investment process involving
(i)Developing a 'sales funnel' of potential investee companies
(ii) Networking and marketing to the list of prospects
(iii) More analysis and negotiation
(iv) Reaching agreement with business vendors and due diligence and
(v) Final proposal to StoreFund board for approval.
It has made an initial acquisition, in the high profile BBQ Factory, a successful specialist retailer with good growth prospects and strong cash flows capable of generating an early dividend stream - providing a working example of the investment philosophy. This will enable would-be investors to decide whether they want to be indirect investors in BBQ Factory and other household similar names.
Without a track record by StoreFund and putting aside the merits of the initial investment made in BBQ Factory, what should you focus on? The people, the offer pricing, the fee structure, the prospects and the risks.
The success of the IPO partly depends on whether investors decide to back the board's ability as directors and the investment and retail management skills of the manager. Undeniably the individuals concerned have the relevant experience. (See panel).
North Head Management, the manager, provides industrial experience across all operational aspects of retail and claims a "sound understanding of what makes an excellent retailer."
They'll make the business selection and use their buying skills to provide value as a finder/acquirer. Strategic, financial and capital allocation expertise will be offered to support growth and innovation to the investee companies.
North Head says it has a track record of enhancing the performance of retail businesses. Davis, an Auckland investment banker, says North Head operates as a "direct investment service firm." He has operated as a private equity investor for some time and is a director of listed manufacturer Skellmax Industries Ltd. With him in North Head are Wayne Walden, a key driver of Farmers in the 1990s as CEO, and Garry Bluett, who was CFO of Farmers.
There has been considerable media comment on the high-end pricing of some IPOs, often at full value. In some cases this has left little room for additional price appreciation once the company is listed and investors are becoming more cynical about price setting.
Book-builds, in particular, are coming under some scrutiny with retail (public) investors not knowing the cost of their investment until institutional bids set the final price. There is no book-build with StoreFund and at $25-30m the issue is probably too small to interest institutions.
The performance objective is to generate shareholder returns in excess of 12% pa. pre-tax (the benchmark and to achieve long-term growth of capital and dividends. This is going to come down to how good the investment strategy is, plain and simple.
A strong point in favour of StoreFund is that it is not spending all of the new share capital in debt repayment. The original $30m is already invested up to $21m in BBQ Factory. There is no debt in StoreFund and only about $5m of term debt in BBQ.
Over time we'd expect that capital to be expanded by way of further capital raisings. How else can they build up a decent portfolio? StoreFund will use a working capital facility to bridge finance acquisitions and those drawdowns will be refinanced via capital raisings.
Davis said directors had contemplated floating an IPO of around $70m but were awake to the risk that this could have resulted in an over-funded starting situation with excess funds earning low levels of interest dragging on the balance sheet. "The lesser evil is to pay as we grow through rights issues."
Some recent issues have been priced at levels that adversely affect prospective gross yield and price earnings ratios. StoreFund says it will have an "attractive gross dividend yield projected to be 10% in FY2005." That is better than other recent floats have offered.
To achieve such a yield StoreFund promising to pay out 100% of income net of management fees and costs. In this sense it is rather like a property unit trust in dividend policy.
Before that occurs, the manager will take a base fee of 1.75% of the invested amount of the company up to $100m, 1.50% $100-150m, 1.25% $150-$200m and 1% in excess of $200m. The invested amount is the weighted average market capitalisation of the company. Plus any borrowing less any cash.
The company will also pay the manager a performance fee of 20% of gross returns in excess of the benchmark, subject to a highwater mark, where gross returns are measured on the change in the market value of the fund between measurement dates and include dividend payments.
This level of fee is similar to what you'd find in private banking funds and, although open to criticism relative to the two new investment funds, would only be around 100 basis points if, say, the gross return reached 15% (20% of 500 bps over the 10% benchmark).
The promoters have sweetened the fee issue by saying they'd be happy to have 50% of the performance fee paid in StoreFund shares (held in escrow for 180 days).
The initial term of the management agreement is 5 years and thereafter can be terminated on 90 days written notice.
The expenses of the offer have been estimated at $2.31m (based on 30 million shares being issued).
Performance data at this stage relates solely to the first investee company, BBQ Factory, a proven performer of 25 years standing with strong growth prospects, uncomplicated business, attractive merchandise, and ongoing expansion of both its product range and number of stores. BBQF is forecasting FY2005 EBITDA of $3.7m with sales forecast to reach $35m.
StoreFund says BBQF's true potential for growth isn't visible in the FY2005 projection because the new ownership will change things, viz; removing current capital constraints, creating a renewed appetite for growth with increased representation, new products and possible acquisition opportunities.
The specific risks are identified as the exposure to the retail sector's risks such as changes in consumer spending, behaviour or tastes, seasonality and increased competition in some segments. The focus on branded retail has relevant risks.
Investing beyond what would usually be defined as retail introduces other risks.
If StoreFund is in too small a minority position it may be subject to decisions that don't align with its own objectives.
Unlisted companies also have lower liquidity.
StoreFund will rely on the capabilities of the incumbent executives within subsidiaries so there is an expo
sure to the loss of key staff
The success and profitability of StoreFund will partly depend on the ability of the manager to invest in well-managed companies that have the ability to increase in value over time.
Weak performance by any one investee company could impact on operating results of StoreFund. We've noted the need for the next few acquisitions to sustain the yield that BBQF achieves. Taking the projected earnings of $1.367m to 30.6.05 shown in the prospective statement of financial performance, EPS would be 4.5c, putting PE at 22x. - which puts the onus on North Head to buy well and release latent growth.
The lead manager for StoreFund is ASB Bank with its organising participant ASB Securities, which managed the recent Kingfish Ltd flotation.
Subscriptions are for a minimum $2,000 and thereafter in multiples of 500 shares.
The offer closes 26.6.04 with allotment 30.6.04 and NZSX listing 1.7.04.
Recommendation: We like the target zone, the philosophy and the quality of the team. We would have liked to see the PE much lower but the yield is handsome if sustained. There will be $11.5m left in the kitty after the BBQ acquisition and StoreFund will be a repeat issuer as it grows. The target is a $100m fund within 5 years. Appeals for mix of yield and capital growth.
Source: The Headliner