Buyouts: what’s hot in 2003?

It’s a slow start and a mixed bag in terms of deal completions and sector preference so far this year. In January there were only nine buyouts announced with a deal value over €1 million and all these are in different sectors. GPs are under pressure to return money to investors as well as having to put money to work and are asking who the stars of tomorrow will be. Which sectors will attract the most investment, but more importantly, which ones will generate the best returns?, asks Angela Sormani.

Chris Hemmings, corporate finance partner at PricewaterhouseCoopers, predicts an upturn outside the UK. “Across the continent there are some nice assets coming onto the marketplace – perhaps more so than the UK. There will be a good spread of deals this year.” It is mostly old economy companies that are attracting interest, he says, but fundamentally on the continent the players are opportunistic. They have to be, particularly in markets such as Italy and Spain where larger deals are harder to come by.

Figures support Hemmings view.

The pattern for the last three years is that European deal value seems to be increasing, while UK deal value is experiencing a steady decline. Players predict this will continue with most seeing more valuable opportunities emanating from continental Europe.

In 2002 deals in Europe rose to $56.3 billion, up from $47.5 billion in 2001. While deals in the UK saw a decrease from $21.6 billion to $19.8 billion, according to data from Thomson Financial.

The most recent figures on sectoral distribution from EVCA reveal that in Europe consumer-related investments in 2001 accounted for the lion’s share of transactions by value at 15 per cent (€3.8 billion). This was closely followed by communications with 14 per cent (€3.3 billion); computer-related deals with 12 per cent (€2.9 billion); industrial products and services with eight per cent (€2 billion) and chemicals and materials with seven per cent (€1.6 billion).

But Hemmings says it is difficult to predict a pattern when the players themselves aren’t looking for one. “If there is good cash flow and good prospects for an exit, then you’ve got a good deal. The reality is most VCs are not sector-specific. Deals will happen all over the place.”

In spite of this many private equity houses are keen to promote a sector focus. HgCapital is one. The group is proud of its specialist focus and has dedicated teams investing in the following industry sectors: business services; healthcare, technology and media. Most recently the group added industrials and consumer (including leisure and retail) to its remit.

Jeremy Sharman, director at HgCapital, says: “Cyclical sectors such as media and leisure offer opportunities for buyouts because they’re undergoing a downturn and there are many parent companies in Europe currently divesting their subsidiaries.” He adds that technology is out of favour with a lot of investors because they’ve been burnt and over-invested in there. But, he says, HgCapital is taking a contrary view to current market conditions and is not shying away from technology investments. The firm favours technology that offers labour-saving devices such as its investments in Trados, a translation services provider, and Comnitel, a network and service management systems developer.

The manufacturing sector has traditionally been a popular choice across Europe with firms such as Industri Kapital allocating the lion’s share of its investments (33 per cent) to that sector. Adrian Johnson, chief executive of Legal & General Ventures, says times are tough in the manufacturing industry and this means there might be opportunities for private equity players to step in. However he says the big question is if a business is having a tough time now, what are its prospects for the future and will it make a viable investment?

One area players predict may see an increase in activity this year is the financial services sector. Robert Donaldson of accountancy and advisory firm Baker Tilly says: “Financial services could be a good area this year. All of the insurers and banks have had an awful six months. This sector has never been a big market for buyouts but this year it might flourish.”

The most notable deal in this sector so far has been Apax Partners’ €418.5 million acquisition of Bipop-Carire’s asset management unit, Azimut last year. This was the largest asset management buyout in Europe to date and also the largest financial services investment Apax has ever made.

Place your bets Last year the consumer sector and sub-sectors within that category

(most notably retail trade eating and drinking places) attracted the highest value of investments. Retail trade eating and drinking places attracted over $3.6 billion invested in seven deals in 2002, according to data from Thomson Financial. This compares to just

$686.8 million in 2000 in 11 deals. However, the decrease in number of deals in 2002 suggests a risk of over-paying for deals, which players are increasingly aware of in the

current climate.

In the amusement and recreation sector there was an increase in terms of both volume and value from $162.5 million in two deals in 2000 to $2.2 billion in six deals in 2002.

Hotels and casinos, however, saw investments peak at $3.9 billion in eight deals in 2001, falling to $1.2 billion in two transactions in 2002. Casinos and gaming is a sector that has always been attractive to private equity houses because there is continuous growth,

says Adrian Johnson. “At a macro level, people have more money to spend than they did 15 years ago and they are spending it on these businesses that don’t have a huge outlay. It’s been a very good sector and I suggest that will continue. The recent Gala deal is proof of this.”

Candover and Cinven last month backed the buyout of Gala, the bingo, casino and online gaming company for £1.24 billion in a tertiary buyout. Gala is being acquired from CSFB Private Equity and PPM Ventures. Candover and Cinven will each invest £274 million for equal equity stakes in the business. In fact, when placing bets on what sectors will see the most buyout activity in 2003, it might not be a bad idea to take a tour through the portfolios of some of the larger mid-market and LBO houses. Anything that has been in the portfolio for three to five years, and beyond, could be a potential secondary buyout opportunity, which, in the current climate (like write offs), is a growing element of the VC’s exit route.

Johnson is upbeat about the leisure sector and he says it wins hands down as far as potential is concerned. “Our deals in the leisure sector are all performing very well.” Casinos, pubs and caravan parks are all solid industries with good revenues. He cites French casino operator Moliflor, Unique Pub Company, and caravan park operator Bourne Leisure as stars to watch out for in the L&G Ventures portfolio. Bourne Leisure sparked an opportunity for Close Brothers Private Equity when portfolio company Park Resorts acquired 13 freehold caravan parks from Bourne Leisure in 2001. The group has most recently expanded with the acquisition of Valley Farm, an 800-pitch holiday park based in Clacton-on-Sea for £7 million.

But, Johnson warns, past performance is no indication of the future. L&G Ventures invests in four main sectors; leisure, consumer, support services and industrial. Over the past years it has invested mainly in leisure and consumer deals. In the industrial sector, the opportunities just haven’t been there, says Johnson.

As far as the recent spate of interest in the health club sector is concerned, Chris Hemmings of PwC jokes: “You’re not a PE house until you own a sport’s centre – nowadays a fitness club qualifies you for a BVCA listing!” Adrian Johnson is sceptical. LGV’s 1996 investment in Pinnacle Leisure was realised when Cannons acquired the business in 1998. Cannons was subsequently taken-private by Royal Bank Private Equity. Johnson says: “At the time I thought this is the time to get out of health clubs and nothing has happened for me to change to this opinion.”

The plight of listed health clubs has been well-documented. Holmes Place and LA Fitness are among the last of the fitness club operators to remain publicly-listed. After promising great growth during the late 1990s, these companies have lost favour on the stock markets and many have sold to private equity firms or sought out mergers. Last summer Duke Street won its hostile bid for UK leisure chain Esporta, and Holmes Place’s management is in talks to take the company private (Bridgepoint is rumoured to be in the running). Some predict LA Fitness might follow suit, especially if market conditions remain tough.

What about retail?

There are mixed views about the retail sector. Johnson says: “There are some good deals out there, but there is a risk of over-paying. The Safeway bid is a typical example. With all the bidders going for it someone will pay too much.” KKR has pulled out of

the bidding process leaving the bankers of Wm Morrison, Tesco, J Sainsbury, Asda and serial retailing entrepreneur Philip Green to battle for the winning fees.

There has always been a high demand for retail trade eating and drinking deals in the private equity sector, in particular for pub deals. Cinven and Enterprise Inns acquisition last year of Unique Pub Company and Voyager Pub Group from Nomura International is a prime example.

Nomura acquired Unique from British brewer Courage and Grand Metropolitan in September 1997 for £1.2 billion and snapped up Voyager’s 990 pubs from Bass in March 2001 for £625 million. The deal last year, valued at £2.01 billion, saw the Cinven-led consortium, including Morgan Stanley’s Princes Gate Investors and Legal & General Ventures committing £372 million for an 83.2 per cent stake in the pub estate.

Morgan Grenfell Private Equity (MGPE) also recently reaped the benefits of its investment in the sector celebrating a second exit from its Laurel Pubs business. MGPE sold Pub Partnerships last year, comprising 1,860 pubs for £875 million to Enterprise Inns.

MGPE acquired the Laurel Pub Company in March 2001 in a deal worth £1.625 billion. The following May, MGPE made its first exit from the group with the sale of 439 managed pubs to Enterprise for around £260 million. The selling phase for the pubs division is over for the time being and Laurel Pub Company is now left with some 600 pubs. The remaining pubs business is thought to be worth around £800 million. See news this issue of DB Capital & MGPE.

Further deals in the food and drink sector last year included Permira’s acquisition of Little Chef/Travelodge for £712 million and ECI’s £26 million MBI of Café Rouge, Bella Pasta and other restaurants sold by Whitbread. French private equity firm PAI is currently in the running to acquire restaurant chain Pizza Express. Equity analysts expect Pizza Express to go for between £200 million and £250million.

A sector most players agree will deliver the goods is healthcare – see healthcare feature this issue. Jeremy Sharman of HgCapital says: “For healthcare, the underlying macro trends are good. People are living longer, the government is paying more money into the NHS and people are spending more on their health generally. But Robert Donaldson of Baker Tilly says: “A lot of the VCs have decided healthcare is good to do. As a result, many will probably overpay for deals in that sector this year.”

A major transaction in this sector last year was BC Partners’ acquisition of The Hirslanden Group, the largest private hospital group in Switzerland, valued at CHF930 million (€640 million). And a good example of a profitable exit from the healthcare sector is LGV’s sale of its majority holding in the Sante Finance clinics group to UHS, a listed American private hospital operator in 2001. LGV committed FF70 million to the transaction, acquiring a stake of just over 50 per cent, which it sold for FF180 million.

LGV’s acquisition of Craegmoor Healthcare Group, closely followed LGV’s exit from Santé Finance, reflecting the group’s keen interest in the healthcare sector. Johnson said:

;It was a difficult year and we felt the UK healthcare sector was a good sector to be in because there were lots of moves planned by the government to improve the healthcare sector.”

But he says: “I don’t know how valuable it is to actually sector-spot. What is important is to have a good knowledge and contacts in the different sectors to spot the right deals at the right time. It is more important to have a broad perimeter, to get to know the people and what’s going on with them. To predict a hot sector; I think that’s quite a difficult game.”