In Europe, much like the U.S., public stock valuations have experienced substantial gains in the past 12 months. But while the recharged markets mean that valuations for public companies are on the rise, it does not necessarily preclude private equity buyers from looking to pick deals off the tickers.
The rigor of quarterly reporting, the volatility of the markets and the defection of research coverage will ensure that public companies continue to seek out buyout investors. Public orphans, abandoned by analysts and investors alike, have become more common following a period of bank downsizing. Alternatively, the glare of the public markets can be vexing as well, as companies push short-term initiatives to placate quarterly expectations, while ignoring a longer term focus at the behest of its investors.
“Some CEOs will say that it’s challenging to pursue a long term strategy or undertake significant change programs in a public environment. They are often talking to a broad investor base with different and, at times, diverging, objectives,” says Philippe Costeletos, a partner with Texas Pacific Group. “Businesses that need to undertake significant change programs will often find easier to implement in a private environment in partnership with one investor group who is willing and able to take a longer term view.”
Additionally, mirroring the effect of Sarbanes Oxley in the U.S., European public companies are seeing the levels of regulation and oversight snowball, making it more laborious and costly to stay listed. “It’s not as advanced as in the U.S. yet, but the amount of regulation continues to increase,” says Colin McKay, the global leader at PricewaterhouseCoopers’ transaction services practice.
Accounting meltdowns from such high-profile names as Parmalat, ABB, Ahold and Royal Dutch/Shell has only hastened this process. Britain has already revised its Combined Code to address the concerns, and the Netherlands has instituted its own Tabakslblat Code. France is also said to fine-tuning new governance policies.
UK PTP Bias
When investors talk about public-to-private deals in Europe, the conversation generally does not stray from the U.K. Out of the 32 deals that have occurred between January 2003 and the end of Q1 2004, half have come from the U.K., according to Initiative Europe. France, with six public-to-private deals occurring during that time, comes in at a far second. Among the more notable transactions is the EURO1.28 billion acquisition of Inmarsat by Permira and Apax Partners, the EURO2.467 billion purchase of Debenhams by TPG, CVC Capital Partners and Merrill Lynch and the EURO1.044 billion buyout of New Look, again by Permira and Apax.
The U.K. stands out from the pack for a couple reasons, with the chief factor being its maturity. Lacking mid- or small-cap markets, most of the other European countries have not developed to the point where their public markets need pruning. A lack of available debt financing can also make PTPs hard to come by in areas such as Central Europe. Poland, with a more advanced market than some of its Central European peers, only had its first PTP last year when Stomil Sanok SA management took the business private in an MBO.
Also, the legal framework in some countries does not cater to PTP transactions. In Spain, for example, there is no law allowing for the squeeze out of minority shareholders. Hence, PTPs are a rare find there. The sale of Parques Reunidos to Advent International represents the only taking-private transaction to have been completed in the region.
Meanwhile, in more developed areas such as Germany and Italy, share ownership is still too clustered for the liking of some LBO firms-it only takes one investor with a 30% stake to scuttle a deal. Still, transactions do get done in these regions, as evidenced by The Blackstone Group’s purchase of Celanese and PAI Partners’ Saeco acquisition, although nobody said it was easy.
Prakash Melwani, a senior managing director at The Blackstone Group, said recently at Kirkland & Ellis’ May 18 Private Equity Summit, “There’s a lot of low hanging fruit [in Germany]. But once you factor in the accounting issues, the regulatory issues and other things, well, let’s just say you earn your stripes when you do a deal in Germany.”
#?*!&! Institutional Investors
Public to privates are never an easy road, even in the U.K., which has a mature market, available financing and no shortage of private-equity money chasing deals. Candover Managing Director Colin Buffin told Buyouts in September, “You generally have to pay a premium on the share price, and it’s an open auction with no warranties or indemnities.”
Additionally, echoing qualms heard in U.S. during the corporate-raider era of the 1980s, a backlash has arisen from the institutional shareholders in England, which is making PTPs increasingly difficult for buyout firms. Disgruntled with the perception of dubious pricing, institutional investors have been stubborn in surrendering their shares in a sale.
In the U.K., if an investor controls more than 10% of a company’s shares, they can block a squeeze out, leaving buyout shops with an uninvited guest in their investment. Duke Street Capital’s Peter Taylor told Buyouts at the end of last year, “It becomes a game of bluff. The bidder can either make concessions or just accept that there’s a minority investor.”
In June of 2003, the buyouts of both Fitness First and PizzaExpress were marred by existing shareholders not selling their stakes. In the case of Fitness First, Deutsche Asset Management even bolstered its position in the company from 7.2% to 10.2% in the weeks leading up to the sale to Cinven. Fidelity and M&G Investment Management proved just as obdurate in the sale of PizzaExpress to TDR Capital and Capricorn Ventures.
In response, bankers in the U.K. are working to develop instruments that would make it easier to accommodate the recalcitrant stockholders. Costeletos says, “We’re starting to see structures that would allow institutional investors to invest in securities that may evolve to track the performance [of an acquired company] on a parallel exchange, such as the AIM.”
Convertible unsecured loan stocks (Culs), which are listed on the London Junior Equity Market AIM, is one way bankers are looking to mollify the two sides. The Culs would allow institutional shareholders to take part in the potential upside in these deals, while making the transactions easier to close for the buyout players involved. Compromises would be made on each side, as LBO firms would probably have to allow for some transparency and the institutional investors would sacrifice liquidity. For two camps that are usually fighting for pension plan allocations, any agreement would represent a landmark for PTPs.
The Road Ahead
Going forward, most anticipate the U.K. will continue accommodating buyout investors that target public companies. The region, even compared to the U.S., is one of the easier areas to get these deals done. Costeletos notes that policies such as the U.K. Takeover Code provide the basis for a fair process in terms of disclosure and access when buying public companies. “The Takeover Panel does not get sufficient credit and deserves special mention… [It is able to] facilitate a process in a very pragmatic way according to the particular circumstances of a takeover.” He cites the PTP deals for Debenhams and Canary Wharf as two instances where the Takeover Panel helped smooth over the process.
Additionally, if a product such as a Cul is eventually developed that could blunt the tension between LBO investors and shareholders, and many think this will at least partially open the floodgates for PTPs in the U.K. However, if valuations continue to expand, and if there’s a pullback from the lenders, any surge in activity could be tempered somewhat.
In other areas of Europe, investors don’t expect PTPs to necessarily represent a steady source of deal flow. In the incipient markets of Central and Western Europe, some feel that the public markets are too nascent to represent a buying opportunity and because of this, are not positioned to experience a shakeout, even during a downturn.
Baring Partners Private Equity’s Gyuri Karady, a managing director for the firm’s Central Europe fund, says, “The expansion of the EU has had a lasting and profound effect on the entire region, but public-to-private deals are not really happening to the same extent as in Western Europe. As the market develops, possibly three to five years down the road, PTPs will become a more systematic target for private equity investors in the region.”