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Thu 10 Sep 2015 07:17 PM

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Sale of stake in fashion retailer Azadea said to stall on price

Sources say KKR and Dubai-based Fajr Capital's joint bid for a 25% stake in Middle Eastern retailer runs into difficulties

Sale of stake in fashion retailer Azadea said to stall on price
Superdry is one of the brands operated by Azadea in the Middle East.

KKR and Dubai-based Fajr Capital's joint bid for a 25 percent stake in Middle Eastern retailer Azadea Group has run into difficulties because of a disagreement over valuations, sources with knowledge of the matter said on Thursday.

The Lebanon-based operator has franchises across the Middle East and North Africa for brands in fashion, food, home furnishings, multimedia and sporting goods, including Gap , Inditex's Zara and Virgin Megastore.

Azadea was said to be targeting between $400 million and $500 million for the stake, with sources telling Reuters in June that the private equity pair where closing in on a deal.

However, the gap between the sellers' expectations and what the potential buyers were prepared to pay widened after Azadea's earnings for the first half of the year trailed forecasts, two sources told Reuters on condition of anonymity because the matter is not public.

The fate of the deal is now uncertain - while some sources said the deal was on hold, others said talks were still ongoing between the parties to try to resolve the issue.

KKR and Fajr Capital declined to comment, while Azadea didn't respond to a request for comment.

Azadea was expecting valuations comparable to that of Saudi Arabia-based retailer Fawaz Al Hokair, but bidders expect a discount to a publicly traded company, people familiar with the matter said.

Fawaz Al Hokair trades at a price-to-earnings ratio of 15.31 times, according to Thomson Reuters data.

"Unless the sellers' expectations come down, I don't see this deal happening," a Dubai-based private equity banker said.

Azadea operates more than 55 franchises through more than 600 stores, according to its website.

With Gulf governments studying revenue-enhancing measures which could reduce the cash in citizens' pockets, from the phasing out of subsidies to the introduction of sales taxes, some bankers are also weighing the impact on valuations.

This does not seem to be hampering the flow of deals just yet, as international investors continue to be drawn to the Middle East's consumer sector given the region's young and increasingly wealthy population.

For example, Abraaj Group and US private equity firm TPG Capital completed the purchase of a majority stake in Saudi Arabian fast-food chain Kudu in April, the first Middle Eastern investment by the latter.

"What people outside the region don't get is that it isn't oil which drives these markets but demographics," said a separate source, a senior investment banker.

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