Advisers suggest that more private equity firms are to follow the template set by Barclays Private Equity and Investcorp, which last week joined forces to buy snack and drinks vending machine maker N&W Global Vending. This is a swift turnaround from the position of two years ago when such club deals came in for criticism from several quarters.
Back then, limited partners threatened to bring legal action against 11 of the largest US firms, claiming that club deals hampered competition by encouraging rival firms to fix sales prices in hotly contested auctions. Regulators such as the Department of Justice were looking into the subject too. Admittedly, this was in a raging sellers’ market and as the credit bubble burst, so these concerns melted away.
However, it was not only those outside the transactions that were complaining. Those on the inside of such deals also grumbled that the resulting vehicles were practically unmanageable. Being run by a committee meant no single owner could take the lead on important decisions. This may yet prove increasingly problematic as investors seek to refinance or exit from the flurry of club deals signed in 2006.
Their unpopularity over the past two years is reflected in Thomson Reuters data, which show that the value of European buyouts in which two or more financial sponsors are involved has dropped from a peak of US$244.5bn in 2006 to just US$75.9bn this year. However, these statistics also show the average deal size has more than halved compared with 2006 to US$76m, indicating that there has been a flurry of smaller club deals this year.
This might just reflect the general market, but it also shows the inventive approach sponsors need to take to get deals away in the current market. The scramble for what remaining leverage is available suggests that firms are prepared to team up with partners so that each can share the burden of putting in higher levels of equity compared with debt.
This is becoming an increasingly popular path to completing a deal. No transaction details were revealed on the N&W Global Vending deal. However, the business made revenues of €395m last year, suggesting it is pretty sizeable.
Investcorp managing director James Mahoney admitted as much, saying: “Current market conditions make the execution of transactions of this size particularly challenging, and as such we are grateful for the continued support of our excellent relationships within the lender community.” A club of eight banks provided the senior debt in this instance.
On this transaction, Investcorp and Barclays Private Equity will have equal shares in the business. However, there have been numerous instances of sponsors and funds run by banks agreeing to take minority stakes in businesses being bought out, presumably to bridge the gap between the value of the deal and what borrowings are available.
For example, in May this year Goldman Sachs supported Lion Capital’s buyout of vodka producer Russian Alcohol. This deal was interesting too because another minority investor was Central European Distribution Corporation, a direct trade rival of Russian Alcohol. The latter has options to take a majority stake at a later date.
This instance of a financial investor teaming up with a financial buyer is not unique. And it is not being done solely with a view to the financial buyer eventually securing an exit by selling on to the trade co-investor. The opposite is also happening.
A notable deal in this vein was Permira’s support of News Corp’s purchase of Nasdaq listed NDS. This US$3.7bn deal, announced in June, saw the European private equity firm take a 51% stake in the screen top box technology developer, with News Corp retaining 49% of the group. Previously, News Corp held 72% of the equity, taking out US$1.5bn cash in this instance.
And in another similar transaction, Blackstone last week said it was buying out most of CMS, an Indian software company, but allowing the founding Grover family to retain a significant minority stake. Expect more of these complex transactions and strange alliances in the year ahead.