Europe Doesn’t See U.S.-Style LBO Boom

Buyout shops have agreed some $72.6 billion of deals so far in 2013, up 209 percent from the same period last year but a far cry from 2007 when $200 billion worth of deals were done in the first quarter. So far this year, 86.8 percent of deals by value have been completed in the Americas, Thomson Reuters data show. Europe has accounted for 10.6 percent of global activity, with $7.7 billion worth of deals agreed.

When it comes to the size of private equity deals done in recent years, “Europe has never been able to keep up with the U.S. and will not in the future,” Joerg Rockenhaeuser, head of Permira Germany, told Reuters on the sidelines of the conference. The global financial crisis hit Europe hard, with Greece, Portugal and Ireland yet to fully recover, and Spain and Italy still dependent the European Central Bank’s pledge last July to rescue the euro.

In February, the United States saw the largest leveraged buyout since the financial crisis. Silver Lake partnered with technology billionaire Michael Dell to take his eponymous personal computer maker private for $24.4 billion. Warren Buffett’s Berkshire Hathaway Inc. is shelling out $12.12 billion in equity as part of its $23.2 billion takeover of ketchup maker H.J. Heinz Co. in conjunction with buyout shop 3G Capital.

In Europe, M&A is far more modest.

Private equity firms are reviving plans for a potential £10 billion ($15.7 billion) buyout of the UK’s biggest mobile operator EE, in what would be the largest deal in Europe since Kohlberg Kravis Roberts & Co. took UK pharmacy chain Alliance Boots private in 2007. There is also talk of bidding interest of up to €4 billion ($5.3 billion) for French catering company Elior, banking sources said.

But these deals, if ever completed, are the exception rather than the norm. Concern about Europe’s political and financial situation has discouraged large-scale dealmaking. “Clearly the size of the bank problem is much larger in Europe and there hasn’t been a central agency like the Fed. As much as the ECB has tried its best, it’s like herding cats,” Leon Black, founder of Apollo Global Management, told delegates. “The politics is so much more difficult. So, overall the view from the U.S. is that Europe seems to be more of a mess.”

Funds have had few investment opportunities as a result of a depressed M&A market over the past few years. According to Thomson Reuters data, private equity firms raised $308 billion in new funds in 2012, down from $525 billion raised at the height of the buyout boom in 2007. Some $59.6 billion came from Europe in 2012, a fraction of the $94.5 billion in 2007.

Many buyout firms have taken advantage of buoyant debt markets to “amend and extend”—borrowing through their portfolio companies to return money to their fund investors through dividends. “Ironically, cheap credit, fiscal easing and liquidity have deferred the restructuring of failed businesses,” Lord Mark Malloch-Brown, chairman of the Europe, Middle East and Africa practice at FTI Consulting, told Reuters. “Funds are sitting on bank lines that are allowing them not to restructure.”

“The very large PE transactions from the 2006/07 period have not done so well. Therefore, some investors are not inclined to give them more money for big deals,” Daniel Flaig, a partner at the Swiss buyout shop Capvis Equity Partners AG, told Reuters.

Ultimately, the question of whether any deals get done in Europe could all come down to price. “Prices are very high, even higher than they are in the U.S.,” said Black. “If you look at the U.S. multiples for deals, they are about 9 times EBITDA. In Europe they average an even higher 9.5 times, and the average growth rate in Europe is negative.”

Anjuli Davies and Arno Schuetze are correspondents for Reuters in London and Frankfurt, respectively. Additional reporting by Gregory Roth.