Buyout sizes have been increasing on both sides of the Atlantic but despite expectations that Europe would produce a mega jumbo buyout sooner rather than later, it is the US market that has set the pace.
Compare the US$45bn buyout of TXU and the US$38.3bn buyout of Equity Office Properties Trust in the US with Europe’s largest buyout, TDC, which comes in at US$15bn, less than half the US deals.
That US deals should produce such large transactions is less surprising than the fact that Europe is yet to produce one, because the conventional wisdom is that the European market can finance bigger deals than the US market.
The US market is fund-driven, with institutional investors providing about 75% of the debt for any given deal. In Europe, the split is 50/50 and given that banks can write much bigger tickets than funds can, there should be more liquidity for deals in Europe than the US.
European leveraged loan banks reckon that €20bn–€25bn can be raised from the European loan market for the right deal, while about €10bn could be raised from the high-yield bond market. Throw in a €10bn equity cheque and you have the necessary financing for a mega jumbo.
Bankers said that as little as two years ago it would have been hard to fund such a deal in Europe and that tapping institutional liquidity in the US would have been essential. This was possible but it did limit the type of asset that could be financed because most US investors only wanted to lend to companies that had US dollar income streams.
Now that so many US investors have set up operations in Europe – with more doing so every month – and are willing to book a wider range of assets, the liquidity in Europe is definitely there. So why has it not happened yet?
The size of European deals has been getting bigger for several years and after the buyout of TDC last year many leveraged bankers began tipping that a €30bn–€40bn jumbo would not be far off.
Kristian Orssten, head of loan debt capital markets at JPMorgan, said that it was only a matter of time before such a deal happened in Europe.
“Jumbo deals can get done in Europe – TDC set the ball rolling last year. There’s nothing holding people back; it’s just a question of finding the right deal with the right story,” he said.
“We are seeing several record-setting jumbo deals in the US and it’s just a question of time before we see more deals in Europe. The market desperately needs some jumbo deals that will soak up some of the enormous liquidity that currently exists across all asset classes,” he added.
One reason that the US has led the way in mega jumbo LBOs, beyond the fact that the US market is more developed, is that doing deals in Europe was politically and legally more complicated.
“Europe is politically more complex and jurisdictional tax regimes have to be favourable for these deals to work,” said JPMorgan’s Orssten. “The equity cheques are very large but with abundant private equity liquidity and the increasingly common phenomena of equity syndicates, this is no longer an obstacle.”
A major factor adding to the complexity of such a large deal in Europe is that almost any deal of that size would be a public-to-private transaction and that is where politics often becomes a factor.
“Some of the assets best suited to a large buyout are utility and telecoms assets, and they are often seen as extensions of the state in Europe, especially Continental Europe, and that can make things tricky,” said the head of loans syndicate at a European bank.
Politics is also playing a role in other ways. The number of aggressive leveraged buyouts in Europe over the past few years has put the spotlight firmly on private equity and much of the attention is not positive. With their propensity for cost-cutting and taking out large dividends, some see private equity houses as little more than rapacious rent seekers.
These sorts of concerns are rarely issues on small deals but they can become so on larger deals, especially when the company is a household name. Two high-profile cases that might fit this bill are iconic UK health and beauty retailer
Late last week
In terms of how governments view private equity, the UK is far friendlier than most Continental European jurisdictions, but given the negative press that private equity has been getting and the fact that millions of Britons shop at Sainsbury and Boots stores every week, the sponsors will be in for plenty of scrutiny should they pursue the deal.
This is nowhere near enough to sink deals at the moment, but the cases will highlight some issues that will need to be addressed in potential buyouts of large companies in Europe.