Lululemon is No Bargain for PE

NEW YORK (The Deal) -- Lululemon Athletica (LULU), the Vancouver-based retailer of yoga-inspired apparel, may be too expensive for private equity buyers, according to industry sources.

With founder Chip Wilson hiring Goldman Sachs & Co. Inc. to advise him on alternatives, according to a Wall Street Journal report this past weekend, and the board likewise looking for financial advice, according to other news outlets, the usual chatter started about PE eyeing it as an attractive target.

Not taken into account was that, while the company has no debt, PE firms tend to steer away from retailers, particularly in the volatile and cyclical world of apparel, if the unaffected stock price is much above 7 times Ebitda, sources said.

With a market cap of almost $6 billion, and an enterprise value of about $5.25 billion after subtracting cash on the balance sheet, Lululemon trades at about 12.5 times the $420 million in Ebitda projected for its current fiscal year.

With a 20% to 30% premium to that unaffected stock price, the deal valuation approaches a multiple of 10 times, the upper range of what PE firms have historically paid to take apparel retailers private.

The higher the multiple, the more equity a PE firm or firms have to sink into a deal, and the riskier the investment becomes.

And PE firms have shown restraint when it comes to deal-making in the apparel sector. Last summer, when Jones Apparel Group Inc. stock spiked on buyout rumors, potential bidders lost interest because a potential deal became too expensive.

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