Restructuring Redwood Retail
Redwood Retail has 3 divisions: Grocery (EBITDA £30m, capex £8m), Fashion (EBITDA £12m, declining 8% pa, capex £6m) and Homeware (EBITDA £5m, loss-making after central costs). Group net debt is £180m at 6% interest. The board is considering a demerger of Fashion, a sale of Homeware for £15m, or a whole-company sale at 6x EBITDA. Central costs are £10m pa and would fall by 40% if Homeware is sold. Redwood's WACC is 9%; Fashion's standalone WACC is 11%.
1. Evaluate the demerger of Fashion versus a whole-company sale, using sum-of-the-parts and the whole-company multiple.
Read the worked answer
Whole-company sale. Group EBITDA = 30 + 12 + 5 = £47m. At 6x = £282m EV. Less net debt £180m = £102m equity value. This multiple likely embeds a conglomerate discount because Fashion is declining and Homeware is loss-making.
Sum-of-the-parts (SOTP).
- Grocery: stable, value at, say, 7x EBITDA = £210m (justified as the strongest division).
- Fashion: declining 8% pa. Value via a declining perpetuity: next-year EBITDA 12 × 0.92 = £11.04m, growing at −8%. Using a simplified capitalisation at 11% WACC: value ≈ 11.04/(0.11 + 0.08) = £58.1m. (Alternative: 5x declining EBITDA = £55m.)
- Homeware: sale value £15m.
- SOTP EV ≈ 210 + 58 + 15 = £283m. Less net debt £180m = £103m equity.
Comparison. SOTP (~£103m) is broadly equal to the whole-company sale (£102m) - so on these numbers a demerger does not obviously create value. However, the SOTP uses a higher multiple for Grocery (7x) than the group (6x); if the market would actually pay 7x for a pure Grocery business, the SOTP is understated. The real value driver is removing the conglomerate discount on Grocery, which could add £30–50m if Grocery re-rates to 7–8x.
2. Should Redwood sell Homeware? Quantify the effect on group EBITDA and value, including central cost savings.
Read the worked answer
Current Homeware contribution. EBITDA £5m, but it is loss-making after central costs. If central costs of £10m are allocated, Homeware's share may exceed £5m - the division destroys value on a fully-costed basis.
Sale effects.
- Proceeds £15m reduce net debt to £165m, saving interest 6% × £15m = £0.9m pa.
- Central costs fall 40% = £4m pa saving.
- Lost EBITDA £5m.
Net EBITDA effect = −5 + 4 = −£1m pa (group EBITDA falls to £46m), but the £4m central saving and £0.9m interest saving mean the cash effect is −5 + 4 + 0.9 = −£0.1m pa - essentially neutral, while removing a loss-making division and £15m of debt.
Valuation effect. At 6x, losing £5m EBITDA reduces EV by £30m, but the £15m proceeds and £4m central saving (capitalised at 6x = £24m) offset. Net EV effect ≈ −30 + 24 + 15 = +£9m. On a standalone basis the sale is mildly value-accretive.
Judgement. Selling Homeware is justified: it is loss-making after central costs, the sale is roughly cash-neutral, reduces leverage, and simplifies the group - improving the Grocery re-rating story. The board should proceed with the Homeware sale and treat the Fashion demerger as a separate, less clear-cut decision.