High price tag for Matalan likely to attract calls for earn-out clause

Hargreaves is seeking as much as £1.5bn for the retailer, 10 times earnings of £145m last year.

The price tag – almost double the £817m Hargreaves paid for Matalan just three years ago – is regarded as high given the uncertain outlook for retailers and concern about any chance of over-payment after a decline in the value of equity in some privately controlled retailers in the wake of the credit crunch.

Corporate finance sources said sale conditions, which might include an obligation for Hargreaves to retain equity in Matalan for a set period or payment by instalment conditional upon targets being met, would allow Hargreaves to achieve his price target and reassure buyers.

One source said: “There are various ways that money could be left in Matalan. Hargreaves doesn’t need all the money at once.” But he said Hargreaves would be a tough negotiator who would want the best deal.

Five private equity groups – Advent, BC Partners, Blackstone, TPG and Warburg Pincus – are understood to have made indicative offers for Matalan last week. Advent’s bid is being led by Richard Baker, the former chief executive of health and beauty retailer Boots.

It is understood that potential buyers want Matalan chief executive Alistair McGeorge to remain at the business after a deal. He has won admiration for improvements made since joining in 2006.

The corporate finance source said: “He’s driven it forward and his job would be to deliver over the next three years and allow an exit.”

No deal is likely to be concluded until the new year, when Christmas trading numbers are in and prospects for the year can be assessed.