The open secret

Now I may not be entirely aware of the situation, as the private equity industry tends to be, well, private (at least for a little while until just before announcements, when someone who owes somebody a favour leaks just enough to offer a profit opportunity and call it even stevens). But I have a question, which I believe is a valid question, and I think you will agree once I explain.

What I don't understand is this: why hasn't anyone bought out Limited Brands (NYSE: LTD)? Now for non-American readers, you might be thinking "what the heck is Limited Brands?" and to which I will reply with two words... "Victoria's Secret".

Yes dear reader (if you exist), Limited Brands is the proud owner of Victoria's Secret. Purveyor of the most seductive undies ever imagined. Brought to the limelight some of the most beautiful women in world history (and almost single-handedly justified the Spanish colonisation of South America. Almost.) Made it acceptable for men to be found in the ladies' section - not to be judged and jeered, but to be respected as thoughtful and confident men purchasing very expensive intimates as a sign of their affections for their female beloveds. Created the one unifying dream for the common appreciation of man and woman alike... that of the woman (preferably of Alessandra Ambrosio-like proportions) prancing around in their lacies with angel wings attached to their backs.

OK seriously, why hasn't this happened? Let's compare it to a typical private equity checklist:

- growing sales: CHECK... but hampered by underperforming departments.
- high and consistent profit margins: CHECK. EBIT margins of 10-11% in retail in the past five years?! And how about Victoria's Secret... 19-20%!!
- recent setbacks/mismanagement resulting in worse financial performance: CHECK... gross profit margins have reduced from 38% in 1Q06 to 34.7% in 1Q07, which flows on to a virtual halving of NPBT margins.
- low gearing: CHECK. 1Q07 debt/equity = $1.664B/$3.010B = 0.55 (anything below 1.00 is healthy/undergeared)... and debt/LTM EBITDA* = $1.664B/$1.435B = 1.16x (anything under 2.00x is regarded as undergeared.)
(*LTM EBITDA = last 12 months' EBITDA, calculated by adding the last three quarters of FY06 to 1Q07... EBITDA = operating income and add back depreciation & amortisation.)
- competitive advantage: CHECK, CHECK, CHECK. Adriana Lima. Alessandra Ambrosio. Gisele Bundchen. Karolina Kurkova. Our very own Miranda Kerr. Best-known underwear brand in the world. Five times the number of stores as your next-best competitor. I mean seriously, if you don't think those constitute "competitive advantage", you shouldn't be playing with other people's money. In fact, you should hand it over to me.
- room for operational improvement: CHECK. See point 3 above.
- thorough due diligence: CHECK. What, you don't think the legions of accountants, tax practitioners, lawyers and management consultants wouldn't be falling all over each other to examine this business, check every nook and cranny, hold multiple site visits, conduct product testing to the nth degree, and discuss "key person" contracts? I swear to you, they would do it FOR FREE.
- easy syndication in debt capital markets: CHECK. By the same token, you think the bankers will say no for the once-in-a-lifetime opportunity to have Victoria's Secret catalogues lying around on their desks, plastered all over their cubicle walls, and strewn all over the male bathroom, AND be able to say "it's for a deal I'm working on" with a straight face? It will be the most oversubscribed debt issue of the year.
- a liquid market to sell off the business to in five years' time: CHECK. You mean we get a SECOND SHOT at due diligence on this company? Hot-diggity!! (The real dilemma is whether you would want to sell it in five years.)

So what am I missing here?
Have women stopped buying sexy lingerie? (No.)
Have men stopped appreciating women who wear sexy lingerie? (Hell no.)
Have they started making a "Victoria's Secret Stash" in plus size? (Oh dear Lord please no.)
Is there a strong supermodel-led campaign against VS with a catchcry of "wearing nothing is better than wearing VS"? (ummm... I can see the pros and cons of both arguments...)

Anyway, I think I've made my point. Kravis, Roberts, Schwarzman... I know you want to.

Just add wings.

UPDATE: Read this report. This was obvious three years ago! You have to respect any report (no matter how unpolished) that somehow manages to use the technical term "going commando".