Exits – MGPE finds winning exit formula

* the same week that it announced the 1.5 billion closing of Deutsche European Partners IV (story, page 4), Morgan Grenfell Private Equity (MGPE) completed two high-profile exits, selling Giraudy to TDI and its Formula One holding to EM.TV, which has acquired 50 percent of the company. These exits were in the final stages of negotiation when MGPE was voted Private Equity Provider of the Year 1999′ at the annual Acquisitions Monthly awards ceremony.

The sale of MGPE’s 12.5 percent stake in SLEC Holdings, the holding company for the Formula One racing franchise represents an exceptionally happy resolution to what was beginning to look like a potentially sticky situation. MGPE receives EM.TV stock worth some $450 million (465 million) compared with the $275 million acquisition consideration for the Formula One stake.

Director Scott Lanphere, the architect of both the Formula One and Giraudy deals, explains that, thanks to a structural anomaly’, Deutsche European Partners IV has effectively achieved an infinite rate of return for its investors on the Formula One deal. MGPE borrowed the money to buy the SLEC shares but, because they were sold within a short period, never drew money down from the fund as equity. The investment proceeds therefore count as pure profit.

The investment’s history, although short, is by no means straightforward.

MGPE acquired the stake in Formula One last autumn as part of a deal intended to pave the way to a flotation for the group. Part of MGPE’s game-plan for Formula One was to introduce a management structure that would – or so observers infer – reduce the direct involvement of its controversial and maverick owner Bernie Ecclestone, whose relationship with the Federation Internationale de l’Automobile, motor racing’s governing body, has had its stormy periods. To implement this strategy effectively, MGPE would almost certainly have required a controlling position, either on a stand-alone basis or as leader of a private equity syndicate, and the group had secured an option to invest a further $975 million to take its holding to 50 percent.

Earlier this year, MGPE decided not to exercise this option. Nevertheless, MGPE was reportedly incensed when SLEC sold 37.5 per cent of its equity to US investment house Hellman & Friedman without informing MGPE, which was legally entitled to approve co-investors. Prior to the Hellman & Friedman deal, EM.TV had been widely tipped as a potential buyer for a majority stake in SLEC. An MGPE spokesman declined to comment directly on the Hellman & Friedman deal other than to observe that it was “an issue that had been taken seriously”.

Partial exit from GoMass

The FFr2.75 billion (419 million) sale of outdoor advertising operator Giraudy to TI represented a partial exit for MGPE from its investment in GoMass media. MGPE led the FFr1.25 billion of GoMass, which included a radio operator as well as Giraudy, from Groupe Lagardere last March, and sold down some 20 per cent of the equity to Goldman Sachs. MGPE, which invested from its Deutsche European Partners IV fund, made three times its money on the sale of Giraudy and retains ownership of the radio business.

Giraudy, which creates, rents and monitors 74,000 billboards for local and national advertising campaign is one of the top three outdoor advertising operators in France. Its new parent, TDI, is a division of Infinity Broadcasting Corporation.

Graham Hutton, MGPE’s chief executive, comments “We are delighted that our judgement in backing this successful business has had such a positive outcome in such a short space of time”.

Discussing the performance of the investment, Scott Lanphere says: “We accrued a huge benefit from the superior execution by the management team in reducing costs and boosting profitability. Having this performance in a rapidly consolidating market allowed us to earn a great return in a short period of time. Outdoor advertising is one of the last true mass media advertising businesses and Giraudy was the last independent in the largest outdoor advertising market in Europe”.