3i, the U.K.’s largest private equity group, in January revealed its plan to acquire Electra Investment Trust (EIT). The approach to EIT, which has assets totaling approximately GBP1 billion ($1.642 billion) and ranks as the U.K.’s second-largest publicly traded private equity investment trust, was unsolicited. EIT rejected 3i’s indicative offer, believed by sources to have valued the trust at around GBP1.2 billion ($1.970 billion).
EIT has now made it clear that, if talks are to continue, 3i must offer a premium to net asset value. EIT has traded at an average 17% discount to net asset value (NAV) in recent months, while 3i shares have commanded a similar premium. EIT’s NAV per share stood at 676p per share for the year ended in September, based in part on very conservative directors’ valuations of unquoted holdings; more recent estimates put EIT’s net asset value at around 729p per share, a figure 3i has dismissed as over-valued. EIT has contracted PricewaterhouseCoopers to audit the trust’s current NAV.
EIT is managed by Electra Fleming, a joint venture between EIT and Robert Fleming, the investment bank. Electra Fleming executives are unlikely to support any 3i bid, largely because of discrepancies in the remuneration structures of Electra Fleming, which operates on a co-investment scheme, and 3i, which does not.
Looking to Increase Its Piece of the Pie
The consensus among industry observers, meanwhile, is that 3i is more concerned with adding EIT’s assets to its own, rather than with the management of the company.
A successful bid for EIT would boost 3i’s assets to around GBP4.5 billion, thus ensuring the group’s continued membership on the FTSE-100 for the foreseeable future. The addition of EIT’s portfolio also would broaden 3i’s exposure to larger U.K. and continental European companies, which have been EIT’s principal focus; 3i, by contrast, has concentrated predominantly on smaller- and middle-market investments. Electra Fleming also has a U.S. presence, whereas 3i has progressively divested its U.S. assets during recent years.
Without the Electra Fleming management team, the projected acquisition would basically be an asset-building exercise for 3i. If 3i can agree on terms with the Electra Fleming executives, the group would extend its already-considerable presence in continental Europe and increase the resources it can bring to bear on larger deals.
Meanwhile, a rival bidder could emerge for EIT-possibly from the ranks of major European insurers, a number of which are currently seeking to build their exposure to private equity.