New Look float won't be cheap chic

Two problems face a fashion retailer – in this case, New Look – that hopes to float on the stock market after a lengthy spell in private equity ownership. The first is Debenhams, where investors are still kicking themselves that they were persuaded in 2006 to buy shares in a business that was carrying too much debt as a legacy of its leveraged buy-out. New Look proposes raising £650m to pay down borrowings, but would still be left with £450m. That is not in Debs' league but would still be three times last year's operating profits. This is a fashion business, remember: there will be times when the buyers read the trends incorrectly, and there will be times when the trends favour more tailored ranges than New Look's. On balance, investors might concede that an annual interest bill of, say, £30m would be manageable. But the size of the remaining debt is not a risk that can be ignored entirely. The "Next problem" is more serious. Next is the company against which other quoted fashion stocks have to be priced. It's just bigger and more reliable than anything else. New Look will argue its cheap'n'cheerful corner of the market is the one that will support more stores. Fine, but Next's territory is less volatile. Next is priced at 11 times post-tax earnings and it's hard to see why anyone would want to pay more for New Look. On the same valuation multiple, a back-of-the-envelope calculation suggests New Look should be worth £1.5bn (including debt), not the £1.7bn-plus that is the ambition. This float is not going to happen easily.