The end of the year is approaching and the buyouts market has fulfilled many of the predictions that were made about it in January. Looking ahead to 2006, it seems that we can expect more of the same, albeit on a grander scale. A year ago we asked whether the market for big ticket M&A might become a dealmakers’ backwater overshadowed by its more dynamic and aggressive buyouts cousin. That reality is still some way off the agenda, but one thing became very clear as this year unfolded: where buyout shops were sidelined from the very top of the M&A market at the start of 2005, private equity must be considered a main driver of the business when comtemplating themes for the year ahead. Europe is way behind the US in its corporate restructuring, and many industries remain fragmented and inefficient.
Cast your mind back to early in 2005, and the viability of club deals was under discussion as rumours emerged of a joint bid by a number of private equity firms for Spanish telecom Auna. We all know how that one evolved, but the year is ending as it began as private equity firms team up for another major European telecom, TDC. Expectations of a strong year for fundraising and the general increase in the number of club deals have certainly been fulfilled.
Blackstone Group, Kohlberg Kravis Roberts, Permira Advisers and Providence Equity Partners have invested about €2.5bn of their own money towards their joint US$12bn offer for the Danish telecom.
Nordic Telephone has offered DKr382 cash per TDC share, which values the target’s equity at DKr76bn (US$12bn). Including TDC’s debt of about US$3bn, the deal is valued at around US$15bn. The offer price is a 39.3% premium relative to the average TDC share price on August 16. The deal, if completed, would be Europe’s largest-ever buyout. Including debt, the acquisition of TDC will be larger than the US$12.8bn acquisition of Italian telecoms company Wind by Naguib Sawiris, a deal that also escaped private equity sponsors.
So what is the downside to club deals? They certainly solidify private equity’s role as a competitor to mainstream M&A and the stock markets, but for LPs there are some downsides. The issue is that limited partners lose their diversification if all the firms that they invest in club together for the same assets in the same sector. That perspective runs contrary to portfolio management concerns that are driving increased demand for alternative assets and for private equity especially. The beauty of private equity in a portfolio is that is provides balance on top of traditional stocks and bonds. The significance of that diversity may be lost if private equity investing becomes homogenized.