Hugo Boss $2.7 Billion Return is the Biggest for Permira

METZINGEN, Germany — Fashion retailer Hugo Boss, an investment emblematic of the difficulties facing its private-equity owner Permira Advisers during the financial crisis, proved to be one of the company's biggest winners of recent years.

Permira sold its remaining 12 percent stake in the Metzigen, Germany-based fashion chain this week, netting its backers 2.5 billion euros ($2.7 billion). Including the proceeds from the 2012 sale of Valentino Fashion Group, Permira's clients will receive more than 2.3 times their total 1.1 billion-euro ($1.2 billion) investment, said Martin Weckwerth, a partner at the London-based firm.

Hugo Boss is the biggest return, in absolute terms, from any investment in Permira’s fourth fund, a 9.6 billion-euro pool raised in 2008, so far, a spokeswoman for the company said. The transaction has helped the fund, which saw its valuation crumble to 39 percent of the backers’ original commitments in 2008, return to profit.

The sale marks a turnaround for an investment that Permira had written down by as much as two-thirds as consumer spending dried up during the financial crisis. Permira even had to step in to buy some of the firms’ debt as it plunged to 38 percent of face value.

Permira, which inherited Hugo Boss in 2007 as part of a 5.3 billion-euro purchase of Valentino Group, made the returns by opening more stores, expanding in the U.S. and China, and shortening lead times between design and point of sale. Private equity firms traditionally profit by selling companies’ real estate or using debt to pay themselves dividends.

“The business was originally 70 percent wholesale, 30 percent retail and the company had around 200 stores,” Weckwerth said. “Now its 55 percent retail and the company operates more than 1,000 stores. It reflects the strategic story of shifting what was originally a branded manufacturer towards today a customer focused branded retailer.”

Store Growth

The geographic spread of the company also changed with Chief Executive Claus-Dietrich Lahrs, who replaced Bruno Saelzer in 2008, doubling the number of U.S. stores and tripling the proportion of the company's sales coming from China to 9 percent.

The shift, which included opening a flagship store in the Taipei 101 skyscraper in 2012, saw sales rise by 60 percent from 2007 to 2.6 billion euros last year. Earnings before interest, taxes, depreciation, and amortization more than doubled to 591 million euros from 275 million euros in the period.

Debt Deal

The drop in the company’s value prompted Permira to negotiate with its lenders over the size and structure of a 2.5 billion-euro debt load. Rather than accept a dilution of its stake through a debt-for-equity swap, Permira spent a further 300 million euros buying loans at the 38 percent of face value from lender Citigroup in 2009.

“We took the opportunity as our view at the time was this was a great company,” Weckworth said. “Other people had less confidence and we could buy the debt back at a very good price.”

By 2013, Permira felt that the company’s transformation was complete, having sold Valentino to a Qatari investment group for 710 million euros a year earlier, and began examining sale options, said Jorg Rockenhäuser, a partner at Permira.

Shares Surge

Given that Hugo Boss had a minority public shareholding throughout Permira’s ownership, which was a legacy of takeover rules in Germany that made it difficult to force minority investors to sell their holdings, a gradual sale of shares by Permira was always the most likely, Rockenhäuser said.

The firm sold a 6.4 percent stake made up of preferred shares in 2011, disposed of about 10 percent in May 2013 and sold an 11 percent stake to institutional investors in September last year. Hugo Boss’s shares surged 121 percent since Permira purchased the company in May 2007, compared with a 91 percent increase for the German DAX Mid-Cap Index.

“Permira added significant operational and strategic value to Hugo Boss,” said Lynn Fordham, chief executive of SVG Capital and historically Permira’s largest backer. The firm “significantly increased gross margins and laid the foundation for its continued success.”

By: Kiel Porter; editors: Mark Bentley and Edward Evans.