Focus Wickes considers a DIY dividend

Home improvement group mulls borrowing £200m after falling markets scupper float

The DIY group Focus Wickes is considering whether to borrow up to £200m to pay shareholders a special dividend, following the shelving of its flotation.

The company announced last week that it would postpone its estimated £1.6bn float on the London Stock Exchange due to market conditions. Directories company Yell also said it would postpone its £2bn float plans.

Last week the FTSE index fell to a five-year low, although the market recovered its losses by Friday's close. Private equity firms face a dilemma when market conditions aren't right to float companies they own. Their main investors are pension funds, and it is preferable for private equity firms to realise their investments to pay back their backers.

A special dividend would mean that Duke Street, the venture capital house that owns 55 per cent of Focus Wickes, would receive some early return. "The debt markets are open for business, in contrast to the equity markets," said Edmund Truell, the chief executive of Duke Street. "The banks to Focus Wickes are very prepared to lend more money in order to enable it to pay a special dividend." The banks are HBOS and ING Barings.

Mr Truell said other options for Focus Wickes are a trade sale to a large international company or to another private equity company, although he said no such talks were taking place. The decision on whether to raise debt for a dividend will be made in the next few weeks.

Mr Truell added that if the flotation is revived, the next opportunity is likely to be in January. Duke Street would have raised around £220m from the postponed flotation. It would still have kept three quarters of its 55 per cent stake because it "believes in the company's future".

With the collapse in share markets, private equity firms have looked at other ways of realising their investments.

Barclays Private Equity and 3i recently realised their £100m investment in Go, the low-cost airline, by selling it for £375m to easyJet, a rival airline that has been popular with investors over the past year. "There have been trade sales, which tend to be where the buyer is going well, such as easyJet," said Tom Lamb, the managing director of Barclays Private Equity.

A common choice has been secondary buy-outs, where another private equity firm will buy the investment. In the first half of this year, the value of such deals shot up to around £2.8bn, compared to £500m in the same period the previous year, according to the Centre of Management Buy-Out Research. Other results show that the value of management buy-outs in the first half of this year fell by more than 50 per cent to £13.2bn.

John Mackie, the chief executive of the British Venture Capital Association, said that the falling stock markets were not yet a concern. "In two to three years, then there is a problem because private equity companies need to be seen to get returns for investors," he said.