This report tries to examine New Look's decision for the new acquirement by analysing the firm's performance in the last five years, internal capital markets (ICM), corporate governance and ownership structure, as well as advantages and disadvantages of acquiring a firm backed by a PE investor.
Finally, the last element of the analysis is the evaluation of the benefits and costs of New Look as a standalone firm, if Brait would undertake successfully an initial public offering (IPO) process to exit from New Look. In the conclusion, we provide a recommendation for the exit strategy of Brait from New Look, if the objective is either to maximise the return to the Limited Partners (LPs) or Brait acts in the best interests of New Look.
New Look Retail Group Limited (New Look) is an international multichannel retail brand, offering value-fashion for women, men, and teenage girls. The company has more than 900 stores, which are mostly based in the United Kingdom (UK). Its e-commerce grew sustainably over the last years and serves customers in 120 countries worldwide. Since 2015, New Look is owned by Brait Societas Europaea (Brait), a private equity (PE) firm.
It is now rumoured that the UK based retailer Next Public Limited Company (Next) is preparing a takeover bid for New Look.
Table of Contents
1 Introduction
2 Financial analysis of New Look
2.1 Profitability ratios
2.2 Liquidity ratios
2.3 Efficiency ratios
2.4 Financial structure ratios
2.5 Segment level performance
2.6 Interim summary
3 Internal capital markets
3.1 Benefits of internal capital markets
3.2 Drawbacks of internal capital markets
3.3 New Look acquisition and internal capital markets value
3.4 Interim summary
4 Next’s corporate governance and ownership structure
4.1 UK corporate governance code
4.2 Board structure and directors of Next
4.3 Next’s ownership structure
4.4 Effect on Next’s internal capital market
5 Acquisition of New Look
5.1 The private equity firm Brait
5.2 Acquisition of New Look
5.3 Interim summary
6 Costs and benefits of New Look as a standalone company
6.1 Benefits of a standalone company
6.2 Costs of a standalone company
6.3 Interim summary
7 Recommendations
7.1 Maximising limited partners return
7.2 Best interest of New Look
Objectives and Scope
This report examines the potential acquisition of New Look by the UK-based retailer Next. The primary research goal is to analyze the financial feasibility of this takeover by evaluating New Look's historical performance, the role of internal capital markets, corporate governance structures, and the strategic implications of acquiring a private-equity-backed company. Additionally, the study assesses whether a standalone exit via an IPO would be more beneficial than a strategic trade sale.
- Financial performance analysis of New Look (2013-2017)
- Evaluation of internal capital markets (ICM) efficiency
- Corporate governance and ownership structure analysis of Next
- Strategic comparison of exit strategies (IPO vs. Trade Sale)
Excerpt from the Book
3.1 Benefits of internal capital markets
To start with, the most important benefits arising from ICM are the more money and smart money referred to by Stein (2003). More money refers to the fact that diversified firms are able to raise more external financing compared to standalone firms as a result of their uncorrelated cash flows. This becomes even more important in cases where the firm suffers from underinvestment as the parent company will unlock more resources and through ICMs distribute resources to expand investments.
This is confirmed by Peyer (2002), as the author finds that diversified firms with large and efficient ICMs use more external financing than other companies. Additionally, smart money reflects the ability of the parent company to allocate resources more correctly as they possess information that external markets will not. The manager will have more knowledge of the various divisions and their prospects, which should lead to better decisions via picking the better projects and engaging in better monitoring.
Furthermore, the parent company has a greater incentive to redeploy capital as it will be used to maximise value whereas managers only care about their own divisional projects. The effect of more money and smart money can be combined into one situation in our case. For example, let us assume that Next controls multiple divisions including New Look. As mentioned earlier Next owns all divisions’ assets and has the authority and desire to allocate resources effectively. If Next, is convinced that New Look has positive net present value investments then Next can use other divisions’ assets as collateral and raise resources only for New Look’s investments.
Summary of Chapters
1 Introduction: This chapter outlines the scope of the study, focusing on the potential acquisition of New Look by Next and the valuation of various exit strategies.
2 Financial analysis of New Look: This chapter provides a comprehensive financial performance assessment of New Look between 2013 and 2017 compared to industry peers.
3 Internal capital markets: This section explores the theoretical benefits and drawbacks of internal capital markets and their relevance to the proposed acquisition.
4 Next’s corporate governance and ownership structure: This chapter analyzes Next's governance framework and how its board and ownership structure might impact the efficiency of internal capital allocation.
5 Acquisition of New Look: This chapter examines the motives for the acquisition from the perspective of both the private equity firm Brait and the strategic buyer Next.
6 Costs and benefits of New Look as a standalone company: This section evaluates the potential outcomes of New Look pursuing an IPO instead of a trade sale.
7 Recommendations: This concluding chapter provides strategic advice on exit strategies, ultimately suggesting that an acquisition by a strategic buyer like Next is in the best interest of New Look.
Key Words
Internal Capital Markets, Private Equity, New Look, Next, Corporate Governance, Financial Analysis, Acquisition, IPO, Trade Sale, Synergies, Ownership Structure, Profitability, Liquidity, Debt, Valuation.
Frequently Asked Questions
What is the core focus of this case study?
The study focuses on the potential takeover of the retailer New Look by Next, analyzing whether this acquisition would add value through internal capital markets and operational synergies.
What are the central thematic fields?
The core themes are corporate finance, financial statement analysis, corporate governance, the mechanics of internal capital markets (ICMs), and the strategic decision-making process behind private equity exit strategies.
What is the primary research goal?
The research aims to determine the most beneficial exit strategy for New Look's current private equity owner, Brait, while evaluating the financial health of New Look and the strategic synergy potential for Next.
Which scientific methods are employed?
The authors employ comparative financial ratio analysis, industry benchmarking, and an extensive review of existing literature and case studies regarding internal capital markets and corporate governance.
What is covered in the main section of the paper?
The main section covers a five-year financial analysis of New Look, theoretical frameworks for internal capital markets, an investigation into Next’s corporate governance, and a strategic assessment of acquisition motives versus an IPO.
Which keywords best characterize this work?
Key terms include Private Equity, Internal Capital Markets, Corporate Governance, Acquisition, and Financial Synergies.
Why is New Look's high debt mentioned as a critical factor?
New Look's high leverage and negative equity make it a risky standalone candidate, which complicates a potential IPO and makes an acquisition by a larger, more stable entity like Next more attractive.
How does the study conclude regarding the role of Next?
The study concludes that Next, being an experienced player in the UK fashion retail industry, has the necessary expertise to improve New Look's performance and achieve efficient resource allocation through synergies.
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- Moritz Meyer (Autor:in), Pedro Coelho da Silva Feteiro (Autor:in), Nikolaos Karakaisis (Autor:in), Anastasios Lingis (Autor:in), 2018, The use of internal Capital Markets based on the example of Next & New Look, München, GRIN Verlag, https://www.grin.com/document/426433
