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Limited future for FTSE 100?

Until now, private equity has not managed to snare a FTSE 100 company, despite record amounts of money being put into public-to-privates in the last year, aligned with a number of eye-popping fundraisings in 2006. In 2007, that could change.

David Simpson, a partner in KPMG’s capital markets group, says “it’s only a matter of time”, adding that there have been a spate of rumours regarding bids for Britain’s biggest PLCs in recent months.

These have included pubs operator Enterprise Inns, UK contract catering group Compass Partners (denied earlier this month), fashion retailer Next, publisher Pearson (reputedly a target for Kohlberg Kravis Roberts) and sugar producer Tate & Lyle (with Blackstone a contender, following its purchase of United Biscuits last year).

However, UK broadcaster ITV is the only FTSE 100 firm to have received a formal private equity bid, involving Blackstone, Apax Partners and Goldman Sachs Capital Partners, which it duly rejected last year. Twice.

The broadcaster had been a takeover target for some time due to ever-dwindling advertising revenues and viewing figures and a lack of focus following speculation that executive chairman Charles Allen would resign. By August of last year, he had, providing a new career U-turn for cigar-chomping Michael Grade and a series of upbeat forecasts.

Whether private equity would have been able to lure Grade to a newly Limited ITV is questionable, although many at the time noted the presence of Grade’s predecessor at the BBC, Greg Dyke, on Apax Partners’ media advisory board and his backing of the bid.

As Simpson says, there may well have been more FTSE 100 companies that have entered into talks with private equity, but the nature of the business means that negotiation stalemates often result in media silence. There’s little value in talking about the ones that got away.

Private equity itself is not invulnerable to such speculation, either. Early last year, rumours briefly graced the broadsheets that listed private equity firm 3i was the subject of a possible buyout offer, in the region of £4bn, before the London-based investor blasted the talk as nonsense.

Outside of the top 100, though, private equity has made more of an impression, with retirement housebuilder McCarthy & Stone going to a HBOS, West Coast Capital and Reuben brothers consortium last year for £1.1bn. HBOS and West Coast Capital are now in line for fellow property developers and FTSE 350 members Crest Nicholson and Wilson Bowden.

According to KPMG’s Cash Counter report, FTSE 350 companies will generate about £198bn in surplus cash over the next two years, funds it could use to stave off private equity bids, most likely through acquisitions or investing in the business. Given that one of a PLC board’s key duties is to return cash to its shareholders, principally in the form of dividends and share buybacks, keeping investors happy this way might be the best form of defence against financial buyers rather than relying on simply being beyond private equity’s cash resources.