UPDATE 3-UK fashion retailer New Look launches $1 bln IPO

* Aims to raise 650 mln stg to cut debt to about 450 mln

* Aims to float on or around March 1 - source

* Existing shareholders may sell "limited" stake

* To invest in UK and abroad, expand ranges and online

(Adds source comments, background)

By Mark Potter

LONDON, Feb 2 (Reuters) - British budget fashion chain New Look launched its long-awaited initial public offering (IPO) on Tuesday, hoping to take advantage of a tentative recovery in new issues and banish the ghosts of the last big UK retail IPOs.

New Look said it planned to raise 650 million pounds ($1 billion) to cut its debts and free it up to invest in opening new stores in Britain and abroad, as well as expand in menswear and childrenswear and on the Internet.

Chief Executive Carl McPhail told Reuters he was cautious about the consumer outlook but was confident New Look's track record of growing in the recession would stand it in good stead.

IPO activity is showing signs of picking up across the world as economic recovery gains hold and private equity firms look to exit investments held over many years. [ID:nLDE60I0D3]

But investors are wary, with many of last year's big European IPOs still below water.

New Look in particular faces a challenge to overcome disillusion created by the IPO of British department stores group Debenhams (DEB.L), which was floated by private equity owners in 2006 laden with debt and saw its shares plunge over the following 2-1/2 years. [ID:nLDE6031JC]

Sporting goods retailer Sports Direct (SPD.L) endured a similar fate following its flotation a year later.

"No interest whatsoever in this IPO," said one head of UK equities at a large fund firm on condition of anonymity. "Fantastic company, but coming in at totally the wrong price for the debt structure.

"Why on earth would you want to invest in a company at a valuation that they are proposing to sell at when it is still left with vast amounts of debt, when you can go into the quoted market and buy companies like Next (NXT.L) and Home Retail (HOME.L) that have no debt, proven management ... and trust and valuations that are much much cheaper," he said.

McPhail said New Look, taken private in 2004 for 699 million pounds by founder Tom Singh and private equity firms Permira [PERM.UL] and Apax [APAX.UL], was different from Debenhams.

CASH GENERATION

The group's net debt would fall to 450 million pounds following the IPO and its strong cash generation meant it would continue to cut its borrowing, he said in a telephone interview.

New Look's owners had also invested about 450 million pounds in doubling the size of the firm and would retain large stakes.

Any sale of shares by existing investors would be limited to an overallotment option to sell about a further 10 percent of stock, he said.

A source close to the matter said New Look hoped to list its shares in London on or around March 1.

New Look, which trades from over 1,000 stores mainly in Britain, reported a 5.9 percent rise in sales at UK shops open at least a year in the 14 weeks to Jan. 2, outperforming rivals such as Marks & Spencer (MKS.L) and Next. [ID:nLDE6050XY]

"We're absolutely in that sweet spot (for growth)," McPhail said, pointing out that while the UK clothing market had achieved compound annual growth of 1.5 percent between 2003 and 2008, that figure was 5.4 percent for the budget segment of the market and 11 percent for New Look.

He declined to comment on New Look's potential market value. A source close to the matter told Reuters on Sunday it was likely to be 1.7 billion to 2.0 billion pounds. [ID:nLDE60U0FE]

Analysts have been looking to New Look as a test case for a potential string of British retail IPOs, with fashion company SuperGroup and grocer Ocado also considering flotations.

But a pick-up in investment appetite from private equity firms has given owners of retail businesses an alternative exit.

Last week, private equity firm KKR agreed to buy Pets at Home for what one source close to the matter was a higher-than-expected 955 million pounds. [ID:nLDE60Q0BM]

Budget fashion chain Matalan and sofa retailer DFS are also in talks over possible private equity bids, sources close to the matter have told Reuters. Such sources said previously New Look was also considering possible private equity bids.

"There isn't a dual process as far as we're concerned. We're working towards an IPO," McPhail said, though he added that the group would consider offers if they were high enough.

Credit Suisse, Deutsche Bank and JP Morgan Cazenove are joint sponsors and joint bookrunners of the share sale, while Lazard is joint sponsor. Barclays, Lloyds, and RBS Hoare Govett are co-lead managers, while Investec and Singer are co-managers. (Additional reporting by Raji Menon and Daisy Ku; Editing by John Stonestreet and David Holmes) ($1=.6278 POUND)