LONDON L’Oreal (OREP.PA) is targeting direct lenders to provide up to €650 million of leveraged loans to back a potential sale of British retailer The Body Shop, in a bid to provide certainty of debt funding and encourage possible buyers to submit an offer for the business, banking sources said.
L'Oreal, which bought the company in 2006, hired Lazard on a sale process that is attracting a number of private equity funds who are lining up indicative bids ahead of a mid-April deadline.
Direct lenders are now being approached to provide debt funding to the possible buyers totaling up to 7 times The Body Shop’s approximate €74 million - €92 million Ebitda. The wide gap in Ebitda takes account of different adjustments, the sources said.
L’Oreal declined to comment. The Body Shop was not immediately available to comment.
Bankers usually approach possible buyers to fund buyout bids with syndicated leveraged finance. In The Body Shop’s case, most bankers say the deal would be better suited to direct lenders.
Banks are wary to underwrite a large buyout loan which could be met with apprehension in Europe’s leveraged loan market. Despite hot market conditions, investors are cautious when it comes to the retail sector, which has seen some borrowers struggle as consumers reign in spending.
“Consumer facing retail is not massively loved. If you look at the two sectors over the past six months that have given banks and investors a headache it is oil and gas and retail. Banks are most probably reluctant to take The Body Shop as a syndication risk, so direct lenders are a natural alternative,” one of the sources said.
Direct lending is growing in popularity as a financing tool. It is usually deployed on trickier credits and is higher yielding but on the upside, it provides borrowers certainty of funding by removing any underwriting and syndication risk.
The number of direct lenders has grown significantly in recent years, with each fund seeking to deploy vast amounts of capital raised from pension funds, insurance companies, sovereign wealth funds and high net worth individuals.
The Body Shop pioneered the ethical beauty products industry four decades ago, but has recently been challenged by weakening sales and profit. Last year The Body Shop saw its operating profit fall to €33.8 million from €54.8 million in 2015, while its revenues dropped to €920.8 million in 2016 from €967.2 million in 2015.
(Editing by Christopher Mangham)