Belgium & Luxembourg: family ties

Belgium’s corporate culture is dominated by family-owned businesses, many of which were set up in the late 1940s and 1950s. Some three or four generations of family ownership down the line, many are facing tough decisions about how to address the future of their companies. The buyout market is primed; waiting for what investors in Belgium think will be good pickings over the next couple of years. Anthony O’Connor reports.

Family-owned businesses will be the main source of buyouts business in Belgium for the foreseeable future. “Family shareholders have to actively invest in their businesses and to acquire others in order to grow. In some cases, especially when the shareholding in one of these businesses has been diluted, strategic decisions can be very difficult to make,” says Robert Van Goethem at 3i in Brussels.

“I believe, in general terms, that M&A is clearly on the agenda in Belgium. Private equity will continue to be active,” says Jan Muyldermans, a partner at PricewaterhouseCoopers tax consultants in Brussels. “Belgium is characterised by family-owned businesses that are fairly well run and do not have the candidates for succession.” Of course, not every family-owned business in Belgium needs or wants to sell to private equity investors, but global pressures are forcing many of them to consider the ownership of companies they have built up from scratch.

Belgium is a country of just over 10 million people and unlike its northern neighbour, the Netherlands, it has always been two markets, split between Flanders and Wallonia, each with a very local focus, unlike the Dutch who have always been solidly outward looking. Hence the existence of big Dutch multi-nationals, while Belgium has few. “The Belgium market does not operate the same way as the French market, which is much more competitive. Belgium is a more complex market because it is split between French and Dutch-speaking people, you’re talking about two fundamental ways of doing business,” says Van Goethem.

The effects of pan-Europeanisation of companies and the introduction of the euro have forced many companies to address the scale effect. Accordingly, many of these companies are being forced to attain critical size in order to remain competitive.

The lack of any suitable successor in the family behind airport services company Aviapartner was the main reason why the company was offered to private equity investors. Although the Aviapartner buyout price tag was kept confidential as part of the sale agreement, at the request of the vendor, private equity players in Belgium say that it was sold for about €160m last September. Aviapartner, its shareholders and 3i completed the sale of 100% of the shares in Aviapartner to Aviapartner LH3 SARL, a vehicle backed by 3i in which certain managers of the Aviapartner group invested. Well known for his service industry expertise in Belgium, Theo Dilissen became the new CEO of the Aviapartner group.

3i is also in the final stages of completing another transport industry buyout in Belgium, which has received national interest because state rail operator SNCB Holding is selling its 100% stake in ABX LOGISTICS Worldwide group. However, this deal has been subject to some delays pending scrutiny by the European Commission. The sale was given the green light in December when, after almost three years, the Commission approved the proposed financial restructuring of ABX LOGISTICS Worldwide. The Commission approved the capitalisation of ABX LOGISTICS Worldwide by its parent company, SNCB, essentially through the conversion into capital of €176m of debt owed by ABX LOGISTICS to SNCB.

In addition, and most likely to 3i’s relief, the Commission raised no objections to the investments made by SNCB during the period from 1998 to 2003 in relation to the creation of the ABX LOGISTICS group. It also approved SNCB’s disposal of the domestic road services company in France in March 2005, since this operation was carried out under market conditions. It is widely understood that the ABX deal will reach financial close in late March or early April.

In Belgium, there seems to be a general recourse to private equity because of the values offered. To secure a large buyout, it is generally understood that the top end of the asking price has to be paid. And prices vendors expect are comparable to those in countries like France, Germany and the UK. That said, deal flow momentum has taken some time to build up. “The Belgian private equity market is quite fragmented, which means it is highly competitive,” says Caroline Daout, a partner at DLA Piper Rudnick Gray Cary in Brussels. “When it gets to large buyouts of more than €100m, you see the big international players come in.”

“The corporate environment has become increasingly aware of buyouts as an alternative exit route,” says Frank De Leenheer at GIMV in Antwerp. “A lot has to do with some high profile large buyouts that we have seen on the Belgian market in recent years and which got a lot of media coverage including Massive (06/2002), Ontex (01/2003), Balta (08/2004), Alliplast (12/2004).”

Candover bought a majority shareholding in Ontex from the Van Malderen family in early 2003, backing the management team led by Bart Van Malderen. It then launched a public share offer for the remaining shares, which was successfully completed in April 2003. Private equity got a bad name in some circles when Candover proceeded to restructure certain aspects of the company, cutting some jobs and in turn generating a negative view in a country where labour unions play a very strong role. Whether any negativity remains or has been dispelled over the last three years is no doubt a matter of perspective.

“The Ontex deal helped to the change the mindset of people. Now, people running business in Belgium are more willing to consider private equity,” says Yvette Verleisdonk, a partner at Nauta Dutilh in Brussels.

“It is true that doing an LBO has negative connotations in Belgium. People think that it’s about cost savings and restructurings. But the perception is changing as more buyouts are completed,” says Kristof Verluyten at Finco in Antwerp.

The volume of further deals this year is most likely not going to quench the growing thirst of non-Belgian investors looking to make investments in the country. There has been talk that Domo will sell off aspects of the business but it is not clear if this group, which specialises in chemicals & polymers, fibres & yarns and floor coverings, will continue with expected carveouts, as has been anticipated by investors in Belgium.

Other chemicals companies are expected to sell off parts of their businesses, including global biopharmaceutical group UCB. Proof that trade sales are still active: Lonza recently acquired the Bioproducts Manufacturing division of UCB for an amount of €120m. “There will be more deals this year. The pipeline seems to be full of family-owned business being sold and some privatisations,” says Van Goethem.

In terms of sectors, the deal flow is mixed but there is some specific focus. “It is across the whole of the economy. If you look at the transactions they tend to be in chemicals, distribution and service providers,” says Daout.

Belgium’s neighbour Luxembourg has obviously built up a reputation as a world-class financial centre, but with a population of around 500,000 people and a limited mid-market business community, buyouts are generally quite scarce. However, Luxembourg has recently attracted a lot of attention from private equity investors, as evidenced by the acquisition led by Apax Partners in July 2004 of International Electronics & Engineering, a developer of automotive safety systems, valued at €125m.

Also, there was the purchase of SBS Broadcasting, one of Europe’s largest broadcasting companies, by funds advised by Permira and Kohlberg Kravis Roberts affiliates, a transaction valued at about €2.1bn in August 2005. More recently, the purchase by eBay of the Luxembourg-based global Internet communications company Skype Technologies, one of whose shareholders was a Luxembourg venture capital firm, in a transaction valued at €2.1bn plus a potential €1.2bn performance-based earn-out.

“Luxembourg is a small market and we don’t have many medium-sized companies,” says Marc Meyers, a partner at Nauta Dutilh in Luxembourg. However, Luxembourg remains a jurisdiction of choice for tax and listing elements of big private equity deals. “For large transactions there is always a Luxembourg vehicle involved, it is always tax driven,” says Meyers.

But back to Belgium, a country with lots of small to medium-sized companies, where they collectively account for 70% of the country’s GDP. It is estimated around 90% of Belgian companies employ 50 people or fewer. “In general, the Belgium market is opening up but it’s not yet mature. There are definitely a great number of companies in the mid-market that will change their ownership over the next five to 10 years,” says Kristiaan Nieuwenburg at Industri Kapital in London. “The Belgian buyouts market is unlikely to ever become bigger than the Netherlands, which is also a small country.”

“There will continue to be buyouts but they will not be the big size deals. My view is that the medium-size market will be active,” says Verleisdonk. In the medium and small buyouts portions of the market, the more locally connected an investment company is, the better it will be able to source deals. “Over the last years we have seen an increased awareness of private equity, increased quality of the deals, more organised and professionalised sales processes and as such a relatively competitive market,” says De Leenheer. “Although, one might not forget that the majority of the deals will never attract foreign interest because of its size.”

Although the international players generally say they are looking at deals of €100m-plus, some Belgian investors believe their home ground, that is, deals up to €100m, may be invaded by international investors keen to make investments.

At the small end of the market there are companies like Finco that focus on small-size buyouts in which the company will invest between €1m and €5m for companies with an enterprise value of between €5m and €15m. “Belgium is a country of many small businesses operating in interesting niche markets with good cash flows. The advantage of concentrating on small buyouts is that you have to be a local player to be successful,” says Kristof Verluyten at Finco in Antwerp.

“We are still closer to the company. Like the big funds we have a financial approach but we have very close contact with the management and operations of a company,” says Verluyten. “Because of our focus on buyouts and our limited geographic focus, we do not have a sector specialism but we do concentrate on companies who are business to business,” says Verluyten.

“The sellers who are private shareholders in companies in Belgium seem more willing to do buyouts not just because they are aware of the concept but because they do not want to sell their companies to competitors, so would rather sell to financial investors,” he says. At the small buyouts end of the market there are reports that banks are clambering to get a piece of the deal and are offering to leverage deals considerably. But at the top end of the buyouts market, the Belgian banks seem to be playing second fiddle to the international banks in London.

“As the deal size becomes larger you see international banks becoming more interested. However, in some cases the local banks are better at understanding companies because they are so much more familiar with them,” says Alex Shivananda, managing director Benelux at HgCapital in Amsterdam.

International sources of finance are not always naturally better or preferred. “I’d certainly look at a combination of international and Belgian banks. That added competition is always healthy,” says Van Goethem.

Belgium’s venture capital market looks set to receive a welcome boost this year with separate initiatives from the regional governments of Flanders and Wallonia, which are both attempting to stimulate entrepreneurial talent and inject some economic zest into their regions. Flanders has launched an initiative called ARKimedes, which will double the risk capital being made available for Flemish fast-growing enterprises. Some €110m was publicly raised by ARKimedes by Belgian retail investors.

ARKimedes will make funds available on a one-for-one basis alongside venture capital investors, which means around €220m will be invested in hundreds of Flemish start-ups and fast-growers. Each investment can access a maximum of €1m of ARKimedes money.

The Government of Wallonia is expected to make available around €160m in a similar way to boost comparable ventures in the south of the country. Part of what is being labelled as the Marshall Plan in Belgium, a €1.4bn economic

regeneration programme, the Government of Wallonia is looking to re-inject the cash it makes from the sale of steel group Acelor to Mittal. It is widely anticipated these two investment schemes will stimulate new ventures, particularly as seed and start-up investment has fallen off in recent years.

On a cultural note, venture capitalists in Belgium believe there is a national inability to allow companies to fail, if that’s what their fate is, which needs to be addressed and be accepted as it is commonly accepted under the Anglo-Saxon model.

There has been some activity in the biotech sector of late, but the IT sector has been a bit sluggish. A more positive outlook could be developing, however. “We’ve seen a substantial increase in deal flow, which we’ll see continue in 2006, particuarly through university spin-offs,” says Barend Van den Brande, managing partner at Big Bang Ventures in Ghent. “The main catalyst for this increase in activity is the government support programme called ARKimedes,” says Van den Brande.

Many local VCs were borne out of captives in Belgian banks. Many of them had a different way of approaching the market from the Anglo-Saxon approach, which has led to some international investors, who are active in Belgium, tending to wait until the third round or later to join them. There could be bad news looming also for later stage investors in Belgium. “I’ve seen several cases in the last six months where well structured start-ups are skipping the later stage investors in Belgium, refusing their term sheets in favour of the international players,” says Van den Brande.

In Belgium, there is no taxation on capital gains, which is obviously good news for VCs. Other legal recent developments also offer some useful incentives for investors. A private equity buyer will normally set up a Belgian vehicle to which a company is sold, resulting in no tax payable by the vendor. Belgium is a relatively high-rate income tax country, with most people on the selling side likely to be taxpayers paying a rate in the region of 50%.

There is, however, a risk if a seller sells a partial stake through the SPV structure and retains a stake in the company, explains Muyldermans. This is an issue that is being debated at present by the Legal and Tax Committee of the Belgian Venture Association, of which Muyldermans is a member.

The new law on Notional Interest Deduction, which deducts interest for risk capital, is desigend to attract local and international investors. “It eliminates or narrows the difference between equity and loan capital,” says Daout. “The notional interest can be deducted if the investment is equity capital.” However, on the flip-side, acqusition costs will be non-tax deductible in the future.

In Luxembourg, the law of June 15, 2004 on the investment company in risk capital (société d’investissement en capital à risque or Sicar) has made an impact on the market. It is a new investment vehicle designed to serve as an alternative to the country’s existing vehicles for investment in private equity and venture capital, such as private companies (mainly partnerships limited by shares), which target a small circle of investors, or undertakings for collective investment (UCIs), which tend to target a broader public.