How far can public/private convergence go?

There has been much talk over the last couple of years regarding the convergence between public and private markets.

There have, of course, been several illustrations of this blurring and convergence. These have included the emergence of funds investing in the public markets but using a private equity type approach; the development of partnerships between private and public equity shareholders in public companies; the closing of the valuation gap between private and public companies; and the rise of secondary and tertiary markets in private equity.

In recent weeks the European leveraged loan market has seen the latest manifestation of the shift from traditional “private” practices towards a “public market” with a slew of deals on which pricing has been decided on a bookbuilding basis (see financial markets (p.)

For example, in March, bookrunners Deutsche Bank and JPMorgan used a structural flex on the €1.22bn debt package supporting CVC’s secondary buyout of French freight vehicle hire group Fraikin to introduce a bookbuilt six-year B loan that was priced at 250bp over Euribor from price talk of 225bp to 275bp. That deal was followed by bookbuilt tranches on World Directories and Flint Group, both through JPMorgan.

But surely this convergence can only progress so far and this week there were indications that there are limits to how far large public companies will emulate private equity techniques.

The most obvious example is J Sainsbury’s fight to keep its property portfolio. After it spurned the generous bid from the CVC led consortium it was expected that supermarket chain would subsequently follow the path of the sponsors, who would undoubtedly have performed an opco/propco divide.

Instead, J Sainsbury has successfully fended off proposals from some major shareholders to split the company into an operating business and property company, looking instead to use its property portfolio to raise further debt while crucially retaining control of the assets.

Shareholder Robert Tchenguiz, who owns 5% of the firm, is known to have approached Sainsbury with a plan to sell off its property portfolio and return money to shareholders. And Three Delta (which recently became a 17% shareholder) is also reportedly interested in divesting some of the business’s property – said to be worth between £8bn and £10bn (US$16bn–$20bn), potentially meaning its current share price of around 570p is 40% undervalued.

“J Sainsbury will be very reluctant to cede control of its stores,” says Rob Orman, a credit analyst at Royal Bank of Scotland. “A retailer needs to be in control of its property to be able to turn warehouse space into retail space, extend the stores, or enlarge the car park for example. An opco/propco split may work from an accounting perspective, but on an operational basis it does not make sense.”

So although Sainsbury is under pressure to perform and justify its decision not to accept swathes of cash to return to its shareholders – it is at the same time not accepting the financial techniques of the private equity community wholesale. Here, the convergence ends.

Sandrine Bradley