Dual-tracks: the pros and cons

The IPO boom at the end of the 1990s was a good time for brokers. Not only did they get to handle flotations but they also managed to convince senior company managers to pay them more for a new product: the dual-track IPO and trade sale. Dual-tracks in some shape or form have actually been around since the 1980s. Back in those days it was the job of the adviser to get the best price, to play the equities market and trade buyers off each other and to see who would stump up the most money.

When the boom turned into doom, dual-tracks were off the agenda. A sale, any sale, was good enough, but, more often than not, company owners spent the time restructuring the business. With a dry exit market comes little business for the brokers and advisers. In 2003, but especially 2004, the whole machine revved up again, and dual-track products were once again in vogue.

Now the choice is not just between selling and floating, it can be between selling (via a trade sale or to a private equity firm), floating or recapping. In these buoyant debt market times, all options are open, and not just to secure an exit, but to get one at a good price. Of course, not all companies are suitable for an IPO, although according to one corporate advisor, this doesn’t stop some banks from selling a dual-track product to a vendor. For that’s exactly what dual and tri-track approaches are, a product.

One advisor puts the figure for large companies that float using a dual-track at around 90%. Kim Wahl, deputy chief executive of Industri Kapital (IK), said IK would always have an alternative to a float in an industrial or financial buyer. “If it’s possible to run a dual-track we always do,” he says.

One of the main reasons for using a dual-track approach is to create a tension between public market investors and a potential buyer. Although officially neither the public market investors nor the trade or financial buyers will know the company they are looking at is taking a dual-track route, generally they do know, and the vendor will play one off of against the other. Stuart Veale, managing director at Beringea, says: “This is one of the attractions of dual-track. If you believe that trade buyers are in the frame, it is a way of keeping them honest in terms of pricing. By running an IPO route in parallel, you know they are offering a fair price.”

Alex Tamlyn, a partner at DLA, adds: “There comes a point when they will know but normally you will keep the process secret for as long as possible. To let the trade buyer know about the possibility of a float is in theory a good thing because it puts them under pressure. Once they put out an intention to float they are showing their hand to the market. Of course, sometimes a trade buyer can leak this information beforehand.” Producing such a tension is not without its negative points.

If the preferred route falls through, the company could find it difficult to reverse course. Tamlyn says: “If a trade buyer knows you were planning on listing but this IPO is called off because a problem was found then this will cause problems for the trade sale because the trade buyer will become anxious to know what went wrong and why an IPO was pulled.”

This is similarly the case if a trade sale doesn’t work out. The public market investors will want to know why the business was rejected, arousing suspicion about the float and potentially having a significant, and detrimental, impact on the float price. This reveals one of the key points behind doing a dual-track: that you know in advance that the prices offered by the public markets and a trade buyer are going to be pretty similar. If not, then it becomes pointless. Fat Face changed hands in May; ISIS sold the UK clothes and footwear retailer to Advent International. ISIS pursued a dual-track and used Ted Baker as a benchmark. Ted Baker has been on the London Stock Exchange since 1997, and has generally performed well since then. However, its share price went from around 520 pence per share in April to around 440 pence in early May. This event, combined with a jittery IPO market and the warnings about retail spending, persuaded ISIS that an IPO would not be the best route to go, and so a sale took place, and one that made the firm a multiple of over 11.5x.

The time schedule of the dual-track approach is one which became especially relevant in October last year with the eventual sale of Saga, the UK holidays and insurance business for the over 50s, to Charterhouse. It was not until the week before the sale to Charterhouse that Saga’s adviser, UBS, announced it was no longer looking to float.

This last minute decision has apparently irritated a lot of public market investors, who had wasted time assessing the company. But UBS did what it had hoped to do, which was to play the public and private markets off against one another, although there have been some suggestions that an IPO was always the second choice anyway.

Mark Barrow, head of the newly created private equity coverage group at Close Brothers, says: “You have got to be very brave to just go down the IPO route. Dual -track is in part about protecting against an IPO failure. A few years ago the IPO market was wide open, but then it died a death and so sellers were only looking at trade sales. Now the IPO market has opened up again but it is pretty fragile. In this environment, a dual -track makes sense.”

But does it make sense to even to bother pursuing an IPO when there are private equity funds out there with money to burn? Dominic Ely of Investec says: “In a number of cases, a dual -track is not really worthwhile. The amount of debt in the market enables the private market to outbid the public market institutions. If the credit cycle is beginning to tighten then we may see valuations between the public and private market becoming closer.”

Undoubtedly, a dual-track approach is a product dreamed up the banks. There were these two different processes and someone decided to put them both together. Tamlyn says: “They have packaged it, called it a dual-track, issued brochures on it and sold it.”

It is common for companies to mandate two banks. The banks will work together to some extent, but the idea is to have the two compete, with one taking a lead on floating, and the other on a sale. The fee arrangements vary. Sometimes it can be split 50/50 regardless of the outcome, other times the fee will go to the bank which gets the exit, with the loser either getting some sort of compensation, or nothing at all. Unsurprisingly, this latter approach can be pretty brutal. Barrow says: “This is extremely aggressive. The divergence between the banks is massive and they will cut each other’s throats.”

Hiring two advisers is not cheap; the whole dual-track process is not cheap, and not just in terms of money, but also time. Tamlyn says: “It’s difficult enough to get companies that are unfamiliar with the float process to do that let alone when they are doing a sale as well. By putting the two together you end up with more work than the two combined. It takes up a lot more resources; the overall costs can be considerable and the amount of work involved for the management team can have a detrimental effect on the company.”

Tamlyn is concerned that some companies buy the dual-track product without knowing what it will entail: “People have got to be much more forensic before they say that this is the right approach for them. It would be a sad thing if every time someone wants to sell a business they thought about a dual-track.”