Doughty Hanson portfolio company RHM is aiming to price the London market’s first hard-underwritten IPO in almost 20 years.
The firm is banking on the defensive nature and track record of the UK food producer to carry off the first significant underwritten deal since 1987’s Black Monday market crash. A decade of underwritten deals came to an abrupt end that year, when banks were left stranded in a £7.2bn deal for British Petroleum (BP) as the London stock market fell by more than 20% in two days.
Hard-underwritten IPOs have been practically extinct since then, but last week CSFB stepped up to underwrite RHM’s global offer at 228p per share. Doughty Hanson was keen to secure an underwritten deal from the outset and banks other than CSFB were responsive to the request.
CSFB will gain the standard 2.5% IPO fee, a 1% underwriting fee and a 0.5% incentive fee for the extra risk. For RHM, the deal implies a minimum market capitalisation of £875m and an offer size of at least £561m. Doughty Hanson and its investors will share in any additional upside generated within the 228p to 285p (£975m) price range.
CSFB and RBS have also underwritten £900m in new loans to take out a securitised bond. Net proceeds will redeem £472m in loan notes issued to Doughty Hanson when the firm bought RHM from Tomkins for £1.1bn in 1999.
If successful, RHM will become Doughty Hanson’s third realisation in the space of a month. Market-wise, it might also set a positive precedent for other private equity owners contemplating underwritten deals for stable, cash-generative investee companies.
Confirming its rapprochement with the public markets – this is the third attempt at an IPO for RHM – Doughty flotated French battery company Saft at €26 a share. (See page 14.)
This Tuesday, the firm also sold UK-based mental healthcare provider Priory Group to ABN AMRO’s structured capital markets division for £875m. The disposal generated a five-times dollar return and a 71% IRR for investors in Doughty Hanson’s third fund.
A number of financial and trade suitors had expressed interest in Priory before Rothschild officially started the auction in May. “The auction result can be considered a good price for a quality asset,” said Steven Bone, the Doughty Hanson principal who worked on the deal.
Doughty Hanson acquired Priory from Westminster Healthcare in June 2002 for £306m, split between £116m in equity and £190m in debt. Under its ownership, financing costs were reduced with the introduction of a securitisation to refinance LBO debt in 2003. “The business also grew by acquisition, with the number of beds increasing by 1,100 to 1,800,” Bone said.
ABN AMRO beat Cinven and Charterhouse, among others, to acquire Priory. In a move that recalls RHM, the bank has underwritten the equity and debt for the acquisition, which will be refinanced. Equity co-investors will be able to participate through direct co-investment opportunities and/or through a fund in due course.