France has traditionally lacked mega deals, and the comparatively low investment figures for 2003 are a resumption of normality. There was only one plus €1bn deal last year, the €1.1bn sale of building materials group Materis to LBO France by CVC Capital Partners, Advent International and The Carlyle Group in September. The second highest was the €802m Fraikin buyout from Fiat by Eurazeo, Pragma Capital and UI. Tom Allchorne reports.
According to the Centre for Management Buy-Out Research (CMBOR), the record of €16.4bn reached in 2002 fell far short in 2003 at just €9bn. In terms of investments made, 2003 saw an increase to 140, 15% higher than 2002’s figure of 122, meaning the French market, again, represented a quarter of all continental buyouts. The huge difference in deal value signifies only that the mega deals market has quietened down, and this is not surprising. 2002 was something of an anomaly in French private equity history in that it saw a batch of plus €1bn deals such as the €5bn Legrand transaction, the €1.6bn Telediffusion de France (TdF) deal, the €1.5bn secondary buyout of Elis and the €1.2bn buyout of Aprovia.
Since the different characteristics of the French buyout market in 2003 and 2002 largely make comparison irrelevant, it is perhaps better to compare the market in 2003 with what happened in 2001, when deal characteristics, at least by size, for buyouts were largely similar. Figures for buyouts in 2001 were valued at €6.4bn into 126 investments. In fact, 2003 experienced a higher amount of investment in buyouts than every year except 2002, and the third highest number of deals since 1989, beaten only by the dot.com years of 1998 and 1999.
Size isn’t everything
As Jamie Weir, director at Duke Street Capital’s Paris office, says: “There was a significant drop in amount invested last year compared to 2002, but this was because the Legrand deal made 2003 look bad and distorted the figures because it was so large. In terms of deal flow last year was actually better.” Unfortunately, quantity does not always mean quality. Jean-Lou Rihon, head of PPM Ventures in Paris, says: “The buyout market in 2003 was not a good year because of the dearth of deals. We are a mid-market fund, focused on transactions between €100m and €600m. In 2002 I counted about 22 eligible deals, by which I mean mature buyouts, not capital development. In 2003 there were only 15. 2003 had several large deals that didn’t happen.”
Charles Diehl, founder and partner at Activa Capital, felt differently: “2003 was a better year for France than 2002, which was quiet. Confidence came back and more transactions were completed.” Last year Activa closed its debut fund in December, exceeding its €150m target by €12m. The fund, which focuses on MBOs and growth capital acquisitions in the lower mid-market region (i.e. between €5m and €20m), made two investments last year, acquiring Vivactis, a French pharmaceutical marketing company, and Mont Blanc, France’s leading dessert brand from Nestlé. In March 2004 the fund became a majority shareholder in Delpharm, a pharmaceutical manufacturing outsourcing company. Diehl’s relatively upbeat report on last year’s market might be attributed to the fact that Activa operates in the lower half of the mid market, whereas PPM Ventures works in the upper-end, currently the most competitive area of French private equity.
Diehl says: “In the top half of the mid market there are a lot of players, French, pan European as well as some industrial, going after deals.” He points to the sale of Pinault Bois & Matériaux, the wood and building materials unit of the Pinault Group. This was acquired by UK builders’ merchant Wolseley in July 2003 and was the subject of a fierce auction process. Wolseley battled it out against French buyout firm PAI Management, a joint offer from ABN AMRO Capital and Barclays Private Equity, and Irish building group CRH.
Competition and pricing
The number of funds in the upper-end of the mid market has been an issue for a number of years now, and it has become particularly salient over the last 12 to 18 months, in part a consequence of the failure of the German private equity market to live up to its hype. “There is a lot of competition,” said Chris Hemmings, new head of European private equity at PricewaterhouseCoopers. “It’s rare to see a proprietary deal today, and I think this will mean that in between five and ten years the market will scale down as players specialise and others fall away.”
“The market is too competitive, from a bank point of view and an equity point of view,” says Olivier Boyadjian, senior director at Bank of Scotland corporate banking’s Paris office. “We see people coming in but no one going out, and there are a lot of funds out there. I see more people entering the market from the banking side, like Irish banks, and I think there will be further consolidation along the lines of Credit Agricole’s acquisition of Credit Lyonnais. But then an efficient market needs competition and quality is always more important than quantity.”
Nigel McConnell, managing director at Electra Partners Europe, says: “The market in France is competitive, too competitive, and I really don’t know why everyone is going out there. These boys are revved up and ready to go. A lot of people seem pretty intent on doing their first deal in France. Some sponsors who usually don’t go below €100m are doing so in France, and Lord alone knows why.” Some of the bemusement could be attributed to France’s strict social policies, like the 35 hour week and the difficulties in sacking an employee. There was talk recently of scrapping or reforming the 35 hour week, but this is unlikely in the wake of the left-wing rout in the regional elections at the end of March.
“In the mid market there is a lot of competition, but this is nothing but healthy for a market, it makes it more efficient,” says Diehl. “It is a more disparate world, but there are still opportunities to dig out original deals and close them.” France is a smaller market than, for example the UK, and so competition is naturally going to be fierce, even more so with the arrival of UK firms and those leaving Germany. While it is quite right to say competition is both necessary and healthy, it is having an effect on pricing, a key issue for firms last year.
Rowan says: “There were some good companies with sound concepts out there, but sellers had trouble reducing the prices. A number of deals were dropped because they were overpriced. In general it was quite hard to sell a company last year, and many have said they will come back to the market at the end of the 2004 when the market conditions should be better.” Because of overpricing there was not a huge amount of investing, rather the market watched in 2003. “There were some silly prices, but not too many,” says Rihon. “I think in general people have remained wise in terms of pricing.”
A negative effect the high levels of competition is the prevalence of the auction process. “A problem today is that the auction process and the due diligence that goes with it are taking so long,” says Boyadjian. “It takes six or nine months for a transaction to get done. A lot of people work on the same transaction and then nothing happens because the price is not what the sellers want.” Of course, selling a company is not just about price, there are a number of other factors which will also influence a seller’s decision. “For Nestlé, when they sold Mont Blanc to us,” says Activa’s Diehl, “it was important for them to know they were passing the company into good hands. Corporate responsibility is very important in France and vendors want to know who they are selling to.”
Competition looks set to increase rather than decrease. The last three to four years has seen a large number of new firms come onto the market, both spin-offs like PAI Partners (from BNP Paribas) and Perfectis (from 3i) and new entrants like Rothschild Capital Partners and Activa. In January 2004 Paris-based Investors in Private Equity (IPE), which was founded in 2002, and American firm WL Ross formed a joint venture and launched a €250m fund called the IPE Expansion Fund targeting the French buyout market. In the same month AtriA Capital Partenaires reached first close on its second fund with commitments of €140m, with a final target of €200m. Duke Street Capital, which has had a presence in France since 1990 as part of Hambro European Ventures, signalled its increased interest in the French market in April 2003 with the formal opening of its Paris office.
“The market needs a clear-out,” says Rihon. “We had one in the 1990s and we need one now.” Hemmings agrees: “The number of funds around is more of an issue than the matter of the capital overhang, which in my opinion is manageable. There has been a downturn in volume of deals and yet volume of players has gone up. There is a mismatch.” McConnell concurs: “The level of competition will push prices up and returns down. The hope is that some of the new entrants will get bloody noses and go somewhere else, as happened in Germany. The secret is to keep cool.”
The reason for such an explosion in buyout funds has as much to do with the wider private equity world as with the idiosyncrasies of France itself. France has been touted as being a big private equity market for a number of years, and is now the preferred destination for US, UK and pan European funds on the continent following the disappointment of Germany. And, unlike Germany, France has a vibrant buyout market that has to a greater or lesser extent delivered deals year-on-year.
Overcrowding in the French market is also having an impact on the relationship between private equity firms and LPs. With more and more firms in the market, there is only so much money that can be raised. Money is not the only issue. Also institutional investors do not have the manpower, time and resources to commit to all these funds. French institutional investors have an unusually low exposure to private equity. According to data compiled by JP Morgan Fleming’s European Alternative Investment Strategic Survey published in August 2003 the average percentage institutional investors in France commit to private equity is not even 0.2%. All the other countries surveyed had higher figures than this, with Italy the second lowest with just over 0.25% and, predictably, the UK the highest with around 4.5%, which is still largely behind its North American counterparts.
The reasons French institutional investors have failed to embrace French private equity are manifold. Part is cultural: they are used to dealing in bonds and real estate. Part is regulatory: the Codes des Assurances states investors cannot have more than 5% exposure to the private equity class, and no more than 0.5% in any one investment. This compares poorly to the rule governing real estate investment: 40% maximum in total, 10% per investment.
This, combined with the low number of pension funds, makes private equity both unpopular and, to an extent, unattractive to institutional investors. Attitudes are changing as more and more French LPs wise up to the potential returns offered by the asset class, but it certainly poses a serious challenge to those seeking to raise funds in the domestic market. The potential saviour for those firms is America. The US investors, having retreated home in more turbulent economic times, are beginning to look to Europe again. And they will be joined this year by US private equity funds; only this January New York-based Vestar Capital bought 75% of Groupe OGF, the French arm of American funeral and cemetery operator for €313m.
It is anticipated that 2004 will herald the return of trade buyers. Away for so long because of poor economic conditions, they are now beginning to return. There were 13 last year, according to CMBOR, the purchase of Arcelor subsidiary, PUM Plastiques, by Saint-Gobain in October being a high profile example. This year has already seen a handful of trade sales. In March, The Carlyle Group and Credit Lyonnais Private Equity sold their interests in French Internet travel company Egencia to InterActiveCorp, owner of US Internet travel firm Expedia. In April there was the €262m sale of French gas distributor Antargaz to UGI, the American energy distributor, by PAI Partners and Medit Mediteranea GLP, an Italian gas distribution company.
“Trade buyers are starting to buy companies that in the recent past would have only been bought by private equity firms,” says Chris Masek, director at Industri Kapital. However, the return of trade buyers will inevitably be slow, and the consensus is their impact will not be felt until the end of 2004/beginning of 2005 as the majority wait to see how the early buyers fair. “Most buyouts will be secondaries this year, probably around 50%,” says Masek.
“Buyouts in general will be quite a hot market in 2004,” agrees Gilbert Saada, a member of the executive board at Eurazeo. “We see a number of sponsors who need to give money back to their LPs, and are doing this through secondary buyouts. Also, even among those large groups who do not have to raise money, they still have a business strategy to focus on, and this could lead to some disposals.” Or, as McConnell puts it: “France has always liked to recycle and it still does.”
In terms of deal sizes, Saada believes 2004 will follow 2003 in that larger transactions will be scarce while the mid market will be busy. Already this year there has been a number of higher-end mid market deals. March saw the €275m secondary buyout of French publisher Groupe Moniteur by French-Canadian private equity group Sagard from Cinven, The Carlyle Group and Apax Partners. April saw PAI acquire 55.4% of Vivarte, the French clothing and shoes retailer, for €40 a share in a public-to-private deal. In a busy month for PAI, the firm sold Diana Ingredients, a supplier of natural ingredients for the food and pharmaceutical industry, to Electra Partners Europe in a €270m transaction.
“Diana Ingredients was very, very competitive,” says Electra’s McConnell. “We were working on it for 12 months before it was marketed, and then at the last minute a big investor come along and tried to blow us out of the water. They were told to go back home and they did, with their tails between their legs.”
On the subject of flotations, it’s anyone’s guess. There is much talk about the return of the IPO, but many in the industry are not so sure whether this year will see many, if any. Weir is circumspect: “Who knows? It seems better at the moment, but the jury is still out. IPOs are not where the stock market is going.” Saada says: “We don’t see the return of IPOs yet. Despite what others are saying, we don’t consider it a serious market.”
Of buyout activity so far this year Masek says: “It’s been stop and go. It started off really slow. Then we had the Vivarte deal, and there were the rumours BC Partners was going to buy Worms & Cie, but this seems to have fallen through. With these two you would have had a decent amount of activity on the market, but so far people feel that activity is slow. People thought it would be busier than it is.” However, most GPs believe 2004 will be busier than 2003. Although the opening months may not have seen the level of activity some were hoping for and cautiously predicting, the mood is more upbeat than it was this time last year. There are already signs the market for exits is beginning to open and there are a number of GPs who feel the level of investment will approach 2002 levels. As Duke Street’s Jamie Weir says: “If you are not optimistic, you shouldn’t be in this game.”