Tag sale aficionados say one person’s junk is another person’s treasure, and while these weekend warriors are seldom associated with buyout professionals, the recent trend among buyout firms shopping for good publicly traded companies whose stock has fallen out of favor in the fickle public markets begs the comparison.
Furthermore, sources say a recent flurry of these deals might be just the beginning of an anticipated influx of public-to-private transactions coming our way.
Over the last few years, buyout firms’ interest in taking public companies private has ranged from hot and heavy to barely there – always one extreme or the other, but hardly ever in the middle.
This year has been no exception.
In fact, more private equity money has been earmarked for taking public companies private than ever before, according to BUYOUTS data.
Since January, financial sponsors, including Investcorp, Bear Stearns Merchant Banking, Silver Lake Partners and Heartland Industrial Partners have shoveled out, or have agreed to commit, almost $10.2 billion to privatize various public companies. At press time, only $2.04 billion worth of those deals had closed, while $8.16 billion worth were still pending, including the largest of them all the $3 billion buyout of Johns Manville Corp. by Bear Stearns Merchant Banking and Hicks, Muse, Tate & Furst (BUYOUTS July 3, p. 1).
At the same time last year, there had only been approximately $5 billion in public market activity by buyout firms, including deals inked and closed. This compares with a total of nearly $3.13 billion in public market buyouts for all of 1998 of which $2 billion emanated from just one Hicks Muse deal.
Now for the kicker, despite these gaudy numbers, sources say buyout firms are just getting warmed up to capitalizing on these deals. Slowly but surely all the factors that make public company transactions attractive – stock prices relative to cash flow and willing boards of directors – are lining up next to each other, and buyout firms are expected to play an even more active role in determining the fates of these companies in the coming months.
“We definitely are seeing a higher volume of public-to-private opportunities,” says Hartley Rogers, managing director and co-head of the U.S./Canada fund at CSFB Private Equity, which recently teamed up with Heartland Industrial Partners to take metal manufacturer MascoTech Inc. private for $2.2 billion (BUYOUTS Aug. 14, p. 8). “We are reviewing a number of those opportunities right now, and I would expect you’ll see us in several more of these deals in the next 12 months.”
All Eyes on the Market
If the first eight months of this year are any indication of what’s to come, many public companies will fetch attractive prices should they choose to go public.
The biggest deal closed so far this year is Investcorp’s acquisition of Jostens Inc., a marketer of commemorative school products and services, for approximately $950 million. Coming in second is Veronis Suhler & Associates’ purchase of Data Transmission Network Corp., an information services company, for $470 million in March (BUYOUTS March 3, p. 12).
Yet some of the most impressive public-to-private transactions to come about this year are awaiting various approvals before they can close. These deals include last month’s $3 billion Johns Manville Corp. buyout, led by Bear Stearns and Hicks Muse, Heartland Industrial’s recapitalization of MascoTech, which, as previously mentioned, totaled approximately $2.2 billion and also involved CSFB Private Equity, and Silver Lake Partners’ $2 billion buyout of computer disk drive maker Seagate Technologies, which was signed in April (BUYOUTS April 17, p. 1).
Taking One for the Team
The pending acquisition of MascoTech is a good example of the type of public-to-private deals that are expected to crop up in the near future.
MascoTech, based in Detroit, manufactures metal for the transportation, industrial and consumer markets. It’s the ultimate Old Economy company that was experiencing depressed stock valuations in the public market, and had been for some time, but all in all is not a doomed company. In fact, the company realized revenue of approximately $1.7 billion last year.
In fact, according to Rogers, MascoTech has leading market positions in many of the segments in which it operates, a consistent record of revenue growth and profitability, ample technical abilities and good relationships with customers and suppliers. However, due to its low stock price, the company did not have access to enough capital to seize all the internal or external growth opportunities. Enter the buyout firms.
The buyers plan to use the company as a platform in a buy-and-build strategy, capitalizing on the fragmented automotive sector, which is ripe for consolidation, says Dan Treadwell, a managing director at Heartland, just as many other buyout firms will do with similar companies in the coming months.
However, Old Economy companies might not be the only ones showing up on buyout firms’ radar screens as potential targets. Due to unpredictable market conditions across a broad range of industries, the crosshairs might hone in on New Economy companies as well.
“Last year’s booming market clearly favored technology and e-commerce companies, but this year you have a choppy market for all industries, including those,” says Lloyd Greif, president and chief executive of Los Angeles-based investment bank Greif & Co. “There are now more ways to play if you’re a buyout firm in terms of where you’re going to find opportunities.”
Spelling out Relief
Greif points out what he calls a perfect example of a New Economy company that found relief from the public market in a going private transaction in VS&A’s March acquisition of Data Transmission Network Corp. (DTN).
DTN provides news, weather and market information mainly over the Internet, satellite, cable and leased lines to subscribers in the agriculture, weather, energy and financial services industries.
The company lacked a significant institutional following, as well as analyst coverage, therefore making it a thinly traded security, Greif says. Yet there were transactional e-commerce opportunities in each of its operating areas, he added.
“We presented it to VS&A as an Old Economy company making the transition into the New Economy,” Greif says. “For the firm, it was like finding a diamond amongst a pile of coal. They paid fair value for DTN and took it private for a very healthy premium to the stock’s then-average trading price. That company is going to do extremely well for them.”
Greif & Co. typically advises on deals that range in size from $50 million to $500 million. For the public companies the firm represents, Greif says he is finding extremely high buyout firm interest, while the companies themselves are receptive to being taken private.
In the past, some buyout firms were wary of getting involved in public situations because they felt they couldn’t control the outcome of a competitive bid-type auction situation, Greif says. But that is no longer the case in many current situations with under-nourished companies.
Furthermore, Greif says shareholders in these companies that have been beat up in the public market are taking kindly to possibly becoming private.
“They’re starting to realize that being public isn’t the cure for all their ills. In fact, it’s usually one of the ills,” Greif says. “The costs of being public are considerable and I’m not just talking about having to have Big Five audited financial statements and doing quarterly SEC filings I’m talking about the fact that you’re living in a glass house and any time you have a significant change in your business, you have to publicly announce it.”
Predicting an Eclipse
CSFB Private Equity’s Rogers attributes the most recent increease in LBO action in the public markets, as well as its potential to continue, to the lining up of all the appropriate planets and stars that play a role in making public companies attractive to buyout firms.
The necessary elements include having stock prices relative to cash flow at a certain level, boards of directors that are willing to consider a going private alternative, active financing markets and plenty of available private equity money, says Rogers.
Out of these, sources agree that the financing aspect is currently the No. 1 challenge to getting buyouts done today.
Although bank financing seems to be available to high quality companies, it’s the high yield market that’s not quite as wide open. Luckily, mezzanine funds have begun to spring up to provide the necessary financing in some cases, but Rogers says he sees a light at the end of the tunnel.
“Depending on what happens with the Fed and with the market’s perception of default rates, we’re certainly hoping for a resurgence in the high yield market over the course of the next six months,” Rogers says. “At that point, there will be nothing standing in the way of public-to-private deals. You’ll have low stock prices, willing boards, active bank markets, active high yield markets and plenty of money.”
Selected 2000 Buyouts of Public Companies
(January through August)
Lead Sponsor Target Value($mil.)
Parthenon Capital Wilmar Industries 300
Odyssey Investment Partners Dayton Superior Corp. 315
Veronis Suhler & Associates DTN 470
Investcorp Jostens Inc. 950
Kohlberg & Co. BI Inc. 85
Berkshire Partners U.S. Can Corp. 275
Leonard Green/TPG Petco 600
Silver Lake Partners Seagate 2,000
Heartland Industrial Partners MascoTech Inc. 2,200
Bear Stearns/Hicks Muse Johns Manville Corp. 3,000