Last week it was announced that a major private equity firm had approached the management of Debenhams with a view to back them in a buyout. There are likely to be more of these public to private deals because venture capitalists have plenty of cash and interest rates on borrowed money are low. As a theoretical exercise, it is worth examining how a deal like this could make money for the backers to see what Debenhams should be worth to a leveraged bidder.

The deparment store chain is an attractive target because it is a stable, cash-generative business with substantial assets. It is enjoying positive like-for-like sales and increasing earnings and dividents. Despite the uncertain retail environment, Debenham's proves a robust business. It owns freehold and long leasehold department stores well worth over the GBP 340m book value, since they were last valued eight years ago.

The mooted price of 425p a share values their share capital at GBP 1.56 bn, and the business carries about GBP 135 in debt. Fees for a deal would probably be at least GBP 75m, giving a total cost of roughly GBP 1.8bn to undertake the buyout.

Over the past five years Debenhams has invested over GBP 600m in new stores and refurbishments. In the next three years, it plans to spend GBP 430m and open nine new stores - GBP170m alone is to be spent in 2004/5. The company has recently been spending GBP 100m annually on share buybacks and dividend payments. Like most buyouts, there will be room to save on this capital expenditure.