MILAN  - Ted Baker could offer a tricky embrace for private equity. Shares in the troubled British maker of colourful shirts rallied 15% on Monday on hopes of a buyout. The affordable luxury brand’s current low stock market valuation and its scant Asia presence are an opportunity. But the returns look modest, and the presence of scandal-hit founder Ray Kelvin may deter some.

Former CEO and creative mind Kelvin, who is Ted Baker’s top investor with a 35% stake, could support a deal to take the fashion group private, the Sunday Times reported. That was a rare ray of sunshine after months of gloom. Allegations of Kelvin’s improper hugging of colleagues rocked Ted Baker’s shares last year, eventually leading to his departure in March.

Repeated profit warnings have made matters worse. After a decade or so of stellar growth, Ted Baker started to run out of steam in its key North American market last year. And, it has struggled to build a base in high-growth Asia. The EBITDA margin is expected to fall to just 13% this year as the group had to discount unsold items and invest in logistics.

Ted Baker has one thing going for it. At barely 9 times its expected earnings, its shares are trading closer to high-street retailer Next than to luxury house Burberry. Even with Monday’s rally, its market capitalisation is barely a third of its 2015 peak. An investor hoping to accelerate Ted Baker’s expansion in Asia could see this as an opportunity.

Yet, the rewards don’t look very appealing. Assume a buyer pays a 30% premium to Friday’s closing price, and funds the 610 million pound acquisition with debt equivalent to 4 times last year’s EBITDA. If they sold at the same roughly 7 times multiple of EBITDA in five years, they would need to grow revenue by at least 6% a year to make an internal rate of return of over 20%, according to Breakingviews estimates. Analysts are forecasting growth of just 4%, Refinitiv data shows. That assumes the new owner can boost the EBITDA margin to 15%, and use 30% of EBITDA to repay debt.

Kelvin’s role remains the key question. As the founder, and creative soul of Ted Baker, a new owner may want to keep him on board. Yet his past hugging habits mean some private equity managers keen to prove their ethical dealmaking kudos may worry about putting off their own investors. Squaring the Kelvin question will require some serious creativity.

CONTEXT NEWS

- Shares in Ted Baker rose 15% on July 22 after the Sunday Times reported that founder and top shareholder Ray Kelvin could back a buyout of the British affordable luxury retailer.

- Kelvin, who owns 35% of Ted Baker, resigned from the company on March 4. He had been on a voluntary leave of absence from his role as CEO since December 2018, when the company started to investigate allegations of misconduct related to his habit of hugging colleagues.

- Ted Baker has lost nearly 60% of its market value over the past 12 months, and was worth around 420 million pounds in late morning trading on July 22. At its 2015 peak, Ted Baker’s market capitalisation was around 1.5 billion pounds.

(Editing by Neil Unmack and Karen Kwok)

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