Apollo Global Management (NYSE:APO) is taking accessories retailer Claire's public. Filing a $100 million registration statement May 3, the private equity investor is looking to take advantage of a very strong IPO market. Publicly traded until May 2007 when Apollo acquired Claire's for $3.1 billion, I'll look at the pros and cons of buying this IPO.
At the top of the list would have to be CEO James Fielding who joined the company in June 2012. Fielding served as the President of Disney's (NYSE:DIS) retail stores from 2008 until his hiring by Claire's in 2012. This is especially important because Fielding took control of Disney's stores after it reacquired them from Children's Place (Nasdaq:PLCE) in May 2008 only four years removed from selling out to the children's specialty retailer. A big part of Disney's about face was Children's Place's failure to refurbish stores as required under the terms of its deal. In the four years that Fielding was President, Disney store revenues increased 43% from $841 million to $1.2 billion. Only 48 years of age, he definitely has plenty of career ahead of him.
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Any successful business must have good people running it. CFO J. Per Brodin held the same position with Centene Corp. (NYSE:CNC) for 27 months before being hired by Claire's in February 2008. Fielding was then brought in and finally, Linda Filler was hired as President of Claire's North America in March of this year. While resumes aren't everything, Filler was an Executive Vice President with Walmart (NYSE:WMT) for five years from 2007 to 2012. Before that she held executive positions with Kraft Foods (Nasdaq:KRFT) and Hillshire Brands (NYSE:HSH). I'd say her background is arguably stronger than Fielding's. That's a good problem to have. Apollo appears to have hired well.
Apollo's timing wasn't the best. When it acquired Claire's in 2007 it had just come off a fiscal year where revenues were $1.48 billion with operating income of $254 million. Life was good--or so we thought. One year later we were hit with the mother of all recessions and retail was in the toilet. Within two years revenues weren't growing and it had operating losses of more than $400 million. CEO Eugene Kahn, who had been brought in by Apollo, eventually resigned in January 2012, but not before restoring growth and profitability. In fiscal 2013 ended February 3, Claire's generated $236 million in operating profits on $1.56 billion in revenue.
Debt That Could Choke A Horse
As I said in the previous paragraph, Claire's had an operating profit in fiscal 2013 of $236 million. Unfortunately, its pretax profit was just $21 million thanks to $206 million in interest payments on $2.36 billion in debt at interest rates between 8% and 11%. Most of which doesn't mature for another six years. Who knows? Perhaps those rates of interest won't look so bad come their maturity but right now they're enough to give investors indigestion.
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Private Equity Flim Flam
Here was a company that had no debt, revenues of almost a billion-and-a-half dollars and an operating profit of $254 million. Today, its revenues are slightly more than that, its operating profit slightly less, and its debt is 100% of equity. It's done little to improve the business while impoverishing it for years to come. Apollo put $600 million into the deal to buy Claire's with debt covering the rest of the tab. If Apollo can get a valuation anywhere near what Sycamore Partners is paying for Hot Topic (Nasdaq:HOTT)--enterprise value of eight times EBITDA--it will be able to get part of its investment back. If it can convince investors that Claire's enterprise value is worth 12 times EBITDA, it will generate a potential gain of $900 million or more. That's just plain wrong.
Anyone who buys this deal is asking for trouble. Claire's has too much debt. Don't give Apollo the chance to jettison itself from an extremely bad deal. The Schaefer family, who controlled Claire's before the buyout, were wise to sell. I doubt they'll be buying shares in the IPO--neither should you.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.