Activist fund Gatemore buys stake in DFS and warns of buyout vulnerability
Gatemore Capital management has bought a stake in DFS and told its fund investors that the sofa chain is undervalued by public markets and thus ripe for a private equity bid.
Adding to its roster of listed British retailers, which includes Moss Bros, French Connection and Superdry, the activist fund told investors last month that it had begun accumulating a shareholding in DFS.
Gatemore managing partner Liad Meidar wrote to the fund’s investors to say that the firm’s weak share price performance – which has been fairly flat since its 2015 IPO – made it vulnerable to a private equity takeover.
“We see material upside to the DFS share price today, with value most likely being unlocked through a private equity take-out at a significant premium or through a return of capital to shareholders via a share buyback scheme,” Meidar wrote in a letter seen by Sky News.
Mediar added that Gatemore intends to grow the stake – which it first took out in September – in the next few months.
“DFS has a history of private equity ownership, and its management team have a track record of running UK retailers under the ownership of foreign buyout groups,” Meidar continued.
“Taking conservative analyst estimates and assuming moderate leverage and no multiple appreciation on exit, our analysis suggests that private equity could pay a significant premium to today’s share price and still achieve an attractive [internal rate of return].”
The takeover vulnerability warning comes after a string of private equity buyouts of British firms this year that culminated with the £7bn Clayton Dubilier & Rice acquisition of supermarket chain Morrisons last month – the UK’s biggest leveraged buyout since 2007.
Buyout groups, flush with cash from consistently low interest rates and yield-hungry investors, have stood in stark contrast to the British firms with depressed valuations that have become a target in the last year, thanks to a combination of Brexit and the pandemic.
In its most recent trading update, DFS said it continues to struggle with severe disruption in its supply chain, even as it reported a 47 per cent jump in revenue and swung to a £100m profit.
The £730m furniture seller’s shares were trading 3 per cent up at 279p this afternoon.
Spokespeople for both Gatemore and DFS declined to comment.