Private equity gets access through rights

The involvement of Warburg Pincus in Premier Foods‘ £404m capital increase has raised the possibility that participation in equity issues by private equity firms could become an alternative to traditional bank underwriting.

Warburg Pincus could acquire up to 20% of Premier once the two-part transaction is concluded and it has secured the right to name one board member in the food group on the basis of its minimum stake of 10%.

While this represents a step down for private equity firms accustomed to majority control and appointing new chief executives, it could mark a shift in strategy towards acquiring large stakes through the part-underwriting of capital raisings.

Premier is issuing 1.55bn new shares at 26p each, representing a 9% discount to the pre-announcement close, of which 1.05bn will be issued through a placing and open offer amounting to £274m and underwritten by Citicorp and RBS Hoare Govett.

Meanwhile, the remaining 498m shares have been offered by way of a firm placing, raising £129m. Warburg Pincus will subscribe to 246.1m firm placed shares and a further 246.1m conditional placed shares, which are subject to a clawback if existing shareholders exercise their full entitlements.

The commitment to take half the firm placing distinguishes WP’s role here from previous flirtations by private equity firms with rights issues. One recent example where a private equity participation fell through was TPG’s withdrawal from a £179m investment in Bradford & Bingley last July, using a material adverse change clause triggered by Moody’s downgrade of the troubled bank.

Warburg Pincus’s allocation of shares in the firm placing implies that it will not be able to pull out of its investment in Premier in a similar fashion.

But bankers close to the deal played down the significance of private equity involvement, on the basis that the firm placing was conceived as a means to allow a number of new strategic investors to take meaningful positions in Premier.

Indeed, the 250m shares in the firm placing not taken by WP have been allocated to a mix of existing shareholders and new investors. Lead banks also held back a small proportion of the shares from the firm placing until last Thursday for investors that had not had the opportunity to step up beforehand.

Warburg Pincus should thus be regarded as one of many, bankers argue, though its minimum stake of 246m shares and board seat undermine this argument.

The appeal for Warburg Pincus is the opportunity to buy into a company at a very attractive level, even though control is more limited than usual and Blackstone’s investment in Deutsche Telekom illustrated the limited value of a single board seat. The structure also appeals to underwriters, as the firm placing takes some risk off the table.

The structure was greeted with reservation by those representing shareholders.

A spokesperson from the Association of British Insurers said the emergence of private equity as an underwriter, as in the placing, was of no concern. However it said the firm placing of any amount of stock beyond rights was a cause for concern and added that, if a rights issue is involved, all stock should be issued through that mechanism.

Where a new investor is brought in through an equity issue, the level of pricing is critical. If stock is offered to shareholders 30% lower down, then the price paid by non-shareholders should be above this level, according to the ABI.

“If non pre-emptive entry is at the same price then this is a cost,” the spokesperson said.