Strong economic growth and factors such as continued investment in infrastructure mean Spain is still attracting new entrants to its buyout market. Doughty Hanson was the latest, opening a Madrid office in September.
Direct equity investment by buyout houses is expected to total about €3bn this year, which is down on 2005’s €4bn figure but still high by Spanish standards.
“Last year’s figures were buoyed by several very large transactions, such as BC Partners’ and Cinven’s €4bn-plus buyout of IT travel business Amadeus,” says Jose Maria Balance, a partner in law firm Lovells’ Madrid office.
Although there have been fewer mega deals, there have been some significant transactions so far this year. In May, Carlyle announced its acquisition of the travel services division of Iberostar for €900m and in March Charterhouse and Impala Capital acquired Levantina, a natural stone company, for €540m.
3i was also active during the year, acquiring frozen food company La Sirena and wind turbine manufacturer Gamesa Energia y Servicios. In July, Goldman Sachs Capital Partners took a 30% stake in family-owned Grupo Vips for around €200m. Vips is a chain of convenience stores and restaurants that also has the Starbucks franchise in Spain and France.
In terms of exits, one of the largest was the sale by Spanish house Mercapital and Bridgepoint of wind farm operator CESA for €1.37bn to construction and energy group Acciona.
Deals in the pipeline include Danish energy company Dong’s intended sale of its Spanish assets.
“They are mainly in wind power and hydro and could go for up to €500m,” says Kevin Woods, partner at corporate finance adviser GBS Finanzas: “We expect to see a lot of interest for the assets by private equity and industrial players.”
In Portugal, there continue to be rumours about Portugal Telecom. A consortium of six buyout houses, including Cinven, Permira and Blackstone, are thought to be preparing a bid of up to €14bn for the company. Earlier this year, Portuguese conglomerate Sonaecom had its €11bn offer for the company turned down.
Historically, a company the size of Portugal Telecom would have been regarded as too big to be acquired by private equity, but the increasing size of funds is putting such assets within reach.
But elsewhere in Portugal activity has been more muted. The only transaction of significant size was the sale last November of Compal, the fruit juice assets of Nutrinvest, for more than €400m. Although there were several private equity bidders, the asset went to savings bank Caixa Geral de Depositos. In March this year, the coffee arm of Nutrinvest, Nutricafes, was acquired by local house Explorer Investments and Spain’s MCH.
“Portugal’s private equity market is incipient and much of it is in the hands of the Portuguese banks, which often use their private equity arms to keep things off their balance sheets,” says one local adviser.
Elizabeth Rothfield, a partner at Explorer Investments, says: “A lot of legwork is needed in Portugal because you don’t get much business from intermediaries here and the market is not as organised as Spain. But it does mean you can acquire assets more cheaply than in Spain.”
Francisco Gutierrez Churtichaga, who heads Doughty Hanson’s new Madrid office, agrees. “The Portuguese market is less competitive, partly because it’s traditionally been less over-banked than Spain,” he says. “We expect to make investments in Portugal but it will take time and is not something we can do just from Madrid.”
Churtichaga believes there is a gap in the Spanish market for a house such as Doughty Hanson. “There are local firms with up to €500m and then there are the very large international houses,” he says. “We think we can occupy that space in between, focusing on deals of €200m–€1bn enterprise value.”
He adds that one of Doughty’s focuses is on family-run businesses, saying: “That’s makes Spain a very good fit because family-owned companies are its backbone.”
Churtichaga argues that there has been a significant evolution in Spanish business’s attitude to private equity. “Three years ago, I’d have said there was still a lot of suspicion among family-owned businesses, with private equity seen as negotiating aggressively and trying to buy up businesses on the cheap,” he says.
But today, Churtichaga says, it is seen as just another source of finance or of a family exiting its business. This has been brought about by the success of transactions such as last year’s €900m acquisition by Apax of bakery company Panrico from the Costafreda family.
But there is still a long way to go in terms of spreading knowledge about the role of buyouts, says Javier Macia, a director at M&A adviser Closa.
“There are still cultural barriers among the smaller family-owned companies because many of these owners do not understand what private equity is or the role of, say, leverage,” Macia says. “I would guess that the number of buyouts per 100 companies is probably lower in Spain than countries like France.”
He says that M&A advisers are not involved that often in the sale of companies and that frequently when Closa is advising on a deal the family selling the company either has a generalist consultant advising or no adviser at all.
“That makes it hard because the vendor does not understand the language of private equity,” says Macia.
Private equity houses are also facing significant competition for some assets from trade buyers.
“We’re seeing a large number of strategic buyers in the market, as the construction companies buy into Spanish utilities,” says Macia. He notes that the construction companies have been diversifying in recent years because of concerns that the property boom might be ending. They have moved into services, such as waste collection, as well as utilities.
Woods notes that one of the attractions of electrical energy in Spain is that it is a bit like buying a bond.
“From a long-term perspective it makes sense because the risk is low once assets are up and running; you can introduce high leverage and there is strong cashflow,” he says.
Spain is also one of the world leaders in the manufacture and use of wind turbines.
“The government has been encouraging production of renewable energy, such as wind, solar and hydro-electric, so there is a favourable regulatory framework in place and renewable energy production is reaching critical mass,” says Woods.
Recent energy deals involving private equity include 3i’s acquisition of Gamesa Energia y Servicios (GES), which constructs and maintains wind turbines.
As well as Spain, the company has markets in Germany, Italy and Portugal, and 3i says a key attraction was the fact that the wind energy business has grown by 30% a year in the past five years and is expected to continue to flourish.
In January, Mercapital and Bridgepoint sold wind farm operator CESA. Bridgepoint was thought to have made a six times return from the sale after taking a 24% stake in 2004.
Trade buyers have beaten buyout houses in a number of energy deals. For example, private equity firms lost out to construction and services firm ACS last year in the acquisition of a controlling stake in the leading electrical generator Union Fenosa.
There has been speculation that the second-largest generator, Iberdrola, could be a takeover target, either from private equity or trade buyers. ACS recently took a 10% stake in Iberdrola, prompting speculation of a merger with Union Fenosa.
Some of the larger buyout houses have also sought to gain minority stakes in listed companies that they feel could be takeover targets, says Woods.
“They’ve asked us to help them identify companies in which they can achieve a capital gain from a stake of 10% or so,” he says. “This is obviously at the more speculative end of private equity investment.”
There is still a lot of buyout money around in Spain, he says, and although interest rates are increasing they are still attractive enough to do LBOs.
“Private equity houses are looking at everything right now, even public-to-privates, although the stock market is fairly high at the moment,” he says.
In terms of the exit environment, Lovells’ Jose Maria Balana says: “There has been a significant increase of secondary buyouts as well as co-investment. Listing on the Madrid stock market remains low and there is little appetite by private equity houses to have their portfolio companies listed on the secondary market. However, there is a very recent growing interest in considering a listing in international secondary markets such as AIM.”
Doughty Hanson’s Churtichaga expects some exits will be through flotations in Spain or through secondary sales to financial investors, but probably most will be through trade sales. Unlike, say, the UK market, in which trade buyers have largely been squeezed out by private equity players, in Spain the cash-rich construction companies and others are much more willing to bid.
One of the main reasons why trade buyers in Spain are more comfortable paying higher prices for assets than in some other countries, says Churtichaga, is that Spain’s economic growth has been so strong.
“Trade buyers are expecting to get higher growth through their acquisitions than perhaps they could expect in other countries,” he adds.
But Closa’s Javier Macia says that it is mainly in the larger deals that trade buyers are able to compete with private equity.
“For large deals involving public companies trade buyers will accept higher leverage, but for the mid-market generally not, which means in that market it’s harder for them to compete with buyout houses,” he says.