RLPC-Bankers work on debt financing for M&S buyout-sources

LONDON, Sept 7 Fri Sep 7, 2012 11:28am EDT

LONDON, Sept 7 (Reuters) - Bankers are exploring debt packages to back a potential buyout of Marks & Spencer after being approached by a number of private equity buyers interested in a deal that will test the leveraged loan market's liquidity capacity, loan bankers said.

Leveraged bankers have estimated that the buyout of M&S would need around 4 billion pounds ($6.37 billion) of debt, evenly split between loans and bonds. A 2 billion pound loan would be the largest sponsor-backed western European leveraged loan since the 9 billion pound loan backing KKR's buyout of Alliance Boots in 2008.

Early-stage discussions have centred on the concept of debt size and structure, and lender appetite, so sponsors can assess whether, in practical terms, they can make an offer for the British clothing and food chain.

"This deal is a really interesting transaction and would be stretching the boundaries of the market, but it is definitely achievable and feasible," a banker said.

A second banker added: "No one wants to say 'no' to something so big, but the fact that it is so big and [would be denominated in] sterling makes it very tough. You can never say never on something like this, though."

M&S's shares closed at 355.80 pence last Thursday - up 6.2 percent from 335.1 on August 1. It peaked at a high of 385.9 on August 24 - 15.2 percent above the August 1 level - as rumours circulated that CVC Capital Partners was exploring options to take the company private.

CVC and M&S declined to comment.

In addition to CVC, private equity firms such as Advent, Lyons Capital and Bain have all looked at the 128-year-old firm, which has a market capitalisation of around 5.7 billion pounds and would draw a sale price of 6-8 billion pounds, bankers said.

STARVED LENDERS

Raising the 4 billion pounds of debt would be a struggle in this market, but is probably achievable. Despite the emphasis on deleveraging, retail and commercial banks are likely to be eager to get involved in such a financing having been relatively starved of decent LBOs this year. Existing lenders are also expected to roll into the new deal and take large holds.

The CLO community is also likely to be eager to invest capital in an M&S deal as the end of their reinvestment periods draw closer and after having experienced a lack of deal supply in tough market conditions. There is also US liquidity as US funds seek to invest in European deals.

Last week, the high-yield bond market re-opened after a long lull, and is expected to remain open until the end of the year, so it would be a good time for M&S to issue notes.

"Despite Basel regulations and deleveraging efforts there is excess liquidity in the loan market and not much supply. By adding up the component parts of retail and commercial banks, CLOs and US liquidity, there is capacity to get the M&S deal done," the first banker said.

There is not the capacity to raise the full amount of debt in sterling, however, so euro and dollar tranches or carve-outs are being considered. That will result in swap costs, but bankers don't think this will deter investors.

"You could sell the M&S deal to investors as you can solve a lot with price," a third banker said.

RETAIL CONCERNS

There is also the added worry that the credit is in retail - a sector which has struggled in tough market conditions.

M&S has been inconsistent in its performance over the years, in part due to the varying success of its clothing range but also because of the changes in shopping patterns, which have seen some customers move to more competitively priced supermarkets.

The company's strong brand, however, makes it a logical target for a leveraged buyout.

"Sponsors buying into M&S need to have the competence to do something with it. It is a tricky deal but not out of the question," the third banker said. ($1 = 0.6275 British pounds) (Reporting by Claire Ruckin, Editing by Chris Mangham)