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Activist fund Gatemore builds stake in furniture chain DFS

Written by on 10/11/2021

A serial activist investor in listed British retailers has turned its attention to DFS, the furniture chain, amid predictions that it could be a takeover target for private equity funds.

Sky News has learnt that Gatemore Capital Management notified its fund investors last month that it had begun building a stake in DFS, which has yet to be publicly disclosed.

Gatemore has previously held stakes in companies including French Connection, Moss Bros and Superdry, and said it believed that DFS was undervalued by the public markets.

DFS share price chart since 2015
Image: Shares have risen sharply over the last year though have stagnated since DFS was floated in 2015

“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,” Gatemore managing partner Liad Meidar wrote in a letter to investors, a copy of which has been seen by Sky News.

Mr Meidar added that his fund had begun accumulating its shareholding in September and that it “expect[s] to expand our position in the coming months”.

DFS has a market capitalisation of just over £700m, having seen its shares rise by nearly 30% during the last 12 months.

Nevertheless, its value has stagnated since its flotation in 2015 at a price of 255p-a-share.

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On Wednesday, the company was trading in the region of 277.5p.

DFS trades from more than 180 showrooms across the UK, and has signalled ambitions to expand the Sofology brand it acquired in 2018 as well as to broaden its presence in the homewares market.

Morrisons is the UK's fourth-largest supermarket chain by market share
Image: The DFS disclosure comes weeks after Morrisons was acquired by CD&R

The disclosure of Gatemore’s position in DFS and view that it is likely to be a private equity target comes weeks after Wm Morrison was acquired by Clayton Dubilier & Rice in the UK’s biggest retail deal of 2021.

This year has been a prolific one for so-called public-to-private deals, with the likes of G4S, the AA and John Laing all being delisted following private equity takeovers.

Gatemore is understood to have had initial engagement with DFS’s board, which is led by chairman Ian Durant and Tim Stacey, chief executive.

“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,” Mr Meidar said in his letter to Gatemore investors.

“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].

“Additional earnings growth could be delivered through the successful expansion into adjacent categories or further vertical integration, which would position the business favourably on exit and deliver material upside to the below returns profile.”

A spokesman for Gatemore declined to comment, while DFS has been contacted for comment.

 Sky News

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