Witchery Group: The anatomy of a private equity deal

Listed clothes retailer, Country Road (ASX: CTY), bought rival chain Witchery Group for $181 million yesterday.

Gresham Private Equity bought Witchery in 2006 and Mimco in 2007, for a reported $175 million, forming Witchery Group.

Mark Youens, the joint head of Gresham Private Equity, Sydney, will not confirm the purchase price, but told LeadingCompany today that the sale is a “good outcome” for Gresham.

He says the structure of the purchase was complicated, and simply subtracting the sale price from the purchase price does not give an accurate insight into the result for Gresham. Eight managers of the group, including Witchery’s CEO Ian Nairn, held equity in Witchery Group.

Katherine Woodthorpe, the chief executive of AVCAL (Australian Venture Capital and Private Equity Association), says the sale is “terrific”. “Gresham did a brilliant job to get a great exit in a quiet environment,” Woodthorpe tells LeadingCompany. “Trade sales are the bread and butter of private equity; it is just that such sales do not usually involve high-street brand names.”

Regardless of the size of the return, the deal is a good example of how private equity can help a company to grow, Woodthorpe says.

Mid-sized companies (with revenues between $10 million and $100 million) are wary of using private equity for growth, but just 10% of leaders and managers have any direct experience of private equity, a recent survey of 1003 companies by accounting firm, PwC, shows.

Only 25% have a “good understanding” of how private equity works. While 42% worry about loss of control to private equity investors, less than half (44%) are aware that “growth private equity” allows owners to retain a significant shareholding.

Private equity as growth capital

Over the past seven years, Gresham grew both Witchery and Mimco significantly. “When we bought Witchery, it had 77 stores and now it has 210. Mimco, which we bought in 2007, had 33 stores. It now has 96.”

Witchery Group is more profitable than Country Road. Witchery’s 2011 revenue of $266 million returned $34 million in net profits (13%), while Country Road’s $413 million returned $39 million in net profits (9%), according to Country Road’s announcement to the ASX.

Secrets of success

Youens says the secret of success with the chains is simple. “It all comes back to one thing: customers. If you find out what they want, and understand that well, it leads to them buying well, and then you can open new stores,” Youens says.

Gresham appointed Nairn as CEO from day one, and Nairn emerges from the sale with a promotion: he is to become CEO of Country Road, overseeing the combined businesses.

Youens, who sat on Witchery’s  board for the past 22 months, says there is never a single way to use private equity for growth. “It might be fixing things, or making more capital available, or additional management. There is not a single rule book. It is what we believe need to have to achieve growth. We don’t have four boxes to tick.”