$780m bid for Pacific Brands

All Black Dan Carter and his wife, Honor Dillon, both model for Pacific Brands' Jockey range. Photo / Herald on Sunday

American private equity giant KKR's play for clothing and homeware wholesaler Pacific Brands highlights how attractive undervalued firms in the Australasian retail sector are becoming to large investors, an analyst says.

Increasingly tough market conditions, particularly in Australia, have prompted big falls in retail stocks.

Melbourne-based Pacific Brands, which is listed on both sides of the Tasman and markets labels including Jockey, advertised by All Black Dan Carter in New Zealand, has seen its ASX share price drop more than 40 per cent since February 2011.

Yesterday, the company announced it had received an unsolicited offer from New York-listed KKR "regarding a possible acquisition of the entire issued capital of the company".

"We aren't surprised at all that large investors are really starting to realise and take note of the value opportunities in Australian cyclical stocks like Pacific Brands," said Peter Esho, chief market analyst at City Index in Sydney. "The good companies are starting to look very attractive."

Pacific Brands said it was considering KKR's approach and preliminary discussions were being held with the US firm.

"There is no certainty that these discussions will lead to any agreement being reached between the parties," said the company, whose other brands include Hush Puppies, Bonds, Dunlop, Berlei, Holeproof and Mooks.

Pacific Brands, which had a market capitalisation of more than A$570 million yesterday, has not disclosed the value of the possible deal, although the Australian Financial Review reported it was worth about A$600 million ($780 million).

Esho said other Australian retailers whose share prices had fallen substantially over the past few months, such as David Jones, could alsobecome acquisition targets.

NZX-listed retailers, including Kathmandu and Pumpkin Patch, have also experienced big declines in their share prices.

Esho said acquisition interest in NZX-listed retailers could not be ruled out.

Pacific Brands' shares on the ASX rallied on the news of the possible acquisition yesterday, closing up 8c at 64c. They closed steady at 72c on the NZX.

Pacific Brands reported a $132 million net loss for its last full-year, and has forecast difficult times ahead, with underlying sales, earnings before interest and tax and net profit (before significant items) expected to fall lower this financial year.

"This is due to a number of negative factors, including continuing weak retail conditions, the changes to our discount department store customer base and substantial input cost increases, particularly cotton prices," chief executive Sue Morphet told shareholders at the company's annual meeting in October.

Esho said a positive aspect of Pacific Brands' business was the progress the firm was making in selling its products online, rather than solely supplying them to retailers.

"We don't have a publicly listed online retailer of any significant size [in Australia]," Esho said. "That's where there is upside [in Pacific Brands]."

KKR

* Founded in 1976.

* Based in New York.

* Has been listed on the New York Stock Exchange since 2010.

* Invests mainly through leveraged buyouts and growth capital investments.