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Furniture rivals JD Group and Lewis are taking very different approaches to how they finance their customers’ purchases: JD Group is moving to separate its consumer loans business from its retail operations while Lewis is sticking to its guns and will keep the two together.

August 20, 2007

Furniture rivals JD Group and Lewis are taking very different approaches to how they finance their customers’ purchases: JD Group is moving to separate its consumer loans business from its retail operations while Lewis is sticking to its guns and will keep the two together.

The JD Group, which is concerned it will continue losing lending business to banks that have recently targeted the lower ends of the market, is responding by attempting to establish a focused lending division with the expertise that will allow it to compete with banks.

This is because, as JD and analysts have pointed out, as markets develop, sophisticated lenders enter the bottom end offering credit that doesn’t restrict where customers shop.

For years consumers in the US have enjoyed the luxury of being able to use their store credit cards at the retail chain that they prefer on any given day, but this has come at a cost: furniture retailers have lost profits from consumer finance.

The JD Group, with its Polish experience, knows that this may well occur here too.

On top of this, the JD Group says splitting the two businesses will allow it to spruce up the furniture retail side of the business.

Local chains have faced criticism that they have been able to be lazy retailers only because they make so much money from their credit extension operations.

But Lewis is adamant that in-store debt collectors who build up individual relationships with customers are a secret to its success.

Developments such as rising interest rates and the National Credit Act mean many potential customers will have to be turned away.

This will give customers who know that they are a good credit risk a lot more power. And with this power will come a desire for greater flexibility. Retailers will ignore this at their peril.

While it is still early days and we will be watching developments with interest, it is likely that the option that gives consumers the most choice will come out tops.

PRIMEDIA: Well, 16 down and just three to go. As it is unlikely that any of the three remaining conditions precedent to the proposed deal will cause insurmountable problems, the Primedia private equity transaction looks like a done deal at this stage.

The three remaining conditions relate to regulatory approval from the Reserve Bank, Icasa and the competition authorities. It’s difficult to see any challenges from these three bodies unless someone, perhaps with a lone Primedia share, was to dream up some reason for intervening in the competition authorities’ deliberations.

Of course the biggest threat to the deal came in that last week after the shareholders had given their overwhelming approval but before the high court had sanctioned the scheme. The threat was in the form of the financial market turmoil that hit global markets and sent the crucial Itraxx index all over the place.

The most challenging of the 19 conditions precedent to the deal was the one requiring that the Itraxx EUR cross-over index series 6 did not exceed 375 on August 12, which was the day before the court was due to sanction the deal. And it didn’t. Although, to be expected given the difficult market conditions, it did frequently exceed 375 during the remainder of the week.

The Itraxx condition has become a feature of private equity deals as it most accurately reflects conditions in the market where the sort of leveraged finance used in private equity deals is placed. If the index had exceeded 375 on August 12, then all of the funders of the Primedia deal – RMB, Citigroup, hedge funds and the consortium – would have been allowed to walk away from the deal.

And such is the rapid pace of change in this relatively new financial market that the Itraxx 7 has already superseded the Itraxx 6 as the most appropriate index.