Hard underwrites return to the public market

The public markets have been bountiful recently for Doughty Hanson. Following on from the 4.25x return on its investment in Saft, the firm last week notched up a 3.4x return on UK food group RHM. The deal, underwritten courtesy of CSFB, followed on from a more modest underwrite for Grammer, which saw that company’s free-float jump from just 17% to 100% in a much shorter timetable than for a standard IPO.

Deutsche took the 8.7m Grammer shares on to its books from two holding companies, which were primarily owned by Permira, before starting the bookbuild on July 13. Marketing had begun with roadshows a week earlier and feedback had left the bank confident of taking on the risk and being able to clear the deal.

The bookbuild was launched at 2.30pm on July 13 and was originally scheduled to complete the following afternoon. Deutsche went out with a price range of €23–€24 off the previous close of €25.35. This gave the company a P/E multiple for 2006 of just over 8x at the mid-point, while car parts comparables such as Brembo, Continental and Kongsberg Automotive trade at 9x–10.5x. Grammer is expected to achieve top line growth of 6% and will also offer a yield of 4.3% through a €1 dividend this year.

The book was covered within one hour, despite equating to several thousand days’ trading, and the lead announced plans to close the book after just two hours. The deal was priced at €23.50, raising a total of €204.7m. The main source of demand was Germany and the UK, with Dutch and Swiss accounts also notable.

Success on the deal set a positive precedent for CSFB, which had underwritten the UK’s first sizeable flotation for about 20 years. Books opened on the RHM float on July 12, with the publication of the price range for the deal. The IPO involved some 45.4m secondary and 185.2m primary shares, sold from a range of 228p–285p. On that basis, RHM was looking at a market cap of £875m–£975m and a deal size of about £575m. The base deal would result in a free-float of 63.9%, and there is a greenshoe of 10%.

Bankers said the price range put RHM on a 2006 P/E multiple of about 10x, compared with a multiple of 11x for the closest comparables. The yield, which on the bookrunner’s figures would be just under 6% at the mid-point of the range, was also broadly in line with the sector, which trades at around 5.5%.

The investment case was presented as a solid defensive story with good visibility on income streams. Bankers argued that it was the defensive nature that made the company suitable for an underwritten IPO, which is a highly attractive option for a secondary seller such as a VC firm.

Bankers away from the RHM deal did not generally criticise the structure, although many said that it could set a precedent that other private equity sellers would want to follow.

“It can’t be used for every company, obviously, but I was pitching to a VC on the day that RHM launched and they were looking at it,” said one head of syndicate. VC insiders also said that the idea is being touted more widely – and that it had been Doughty Hanson that had asked for the commitment when banks were pitching, rather than having the idea pushed by just one bidder.

The result adds further weight to the claims. Based on an offer price of 275p, RHM’s market cap was £958m on its first day of trading this week on the London Stock Exchange. Including net debt of £711m, RHM’s enterprise value is £1.67bn.

Doughty Hanson has retained a 33% shareholding in RHM, which is worth £311m. If the over-allotment option is exercised in full, the stake will fall to 26%. As a result of the float, the firm is returning £585m to investors.

It bought RHM in 2000 for £1.18bn, financed through £308m in equity and £872m in debt. Under the firm’s ownership, Ebita increased by 28% to £155m for the year ended April 30 2005. Transaction debt was reduced by 20% through deleveraging.

Doughty Hanson has returned £2.1bn to investors in its third fund. Realisations also include Priory Group, Dunlop Standard, ATU, Umbro and FL Selenia.

Fees on the RHM deal were 2.5% for the banks, plus 1% to CSFB for the hard underwriting and an additional 0.5% incentive. Although some comment was made last week of the extra fee that RHM is paying for the underwriting, most bankers agreed that a mere 1% for more than £500m of risk was hardly extortionate.

CSFB has sub-underwritten an undisclosed portion of its risk to institutional investors rather than to co-leads Citigroup, Deutsche Bank, HSBC and JP Morgan Cazenove. Bankers reported very extensive pilot fishing of the deal by CSFB ahead of formal launch, and many speculated that the book would have been at least informally in very good shape before any official orders.