Private equity’s mixed signals

Two deals during August showed that private equity firms are prepared to pay up for assets being divested by public companies, as long as they are in the right sector and showing strong growth.

At the end of last month, US private equity house Clayton Dubilier & Rice succeeded in picking up the industrial testing division of UK mid-cap engineer Bodycote. The firm won a highly competitive process, paying about 20 times the £21m operating profits the business made last year. It was also prepared to use equity to fund more than half the £417m purchase price. (See page 6.)

The resilient nature of the activities of Bodycote’s testing division doubtlessly made it an attractive asset to sell. It is also growing quickly. Based on this year’s expected earnings before interest, tax, depreciation and amortisation, a source suggested that the deal valued the business at a more modest 10 times earnings.

Clayton Dubilier & Rice’s chief executive Donald Gogel said that the business “exhibits the key characteristics that we look for in all of our investments”, namely “a market leading services business with customers in diversified and resilient industries”.

Gogel added: “Our ability to execute this transaction in the current environment reflects the flexibility of CD&R’s operating model”. The firm specialises in installing partners in its portfolio companies to effect operational changes, in this case Fred Kindle.

Bodycote is not the only FTSE 250 engineer that has succeeded in divesting a valuable asset to a financial buyer at a high price lately. Earlier this month, Hunting offloaded Gibson Energy, its Canadian oil and gas transport business to Carlyle and its linked energy sector specialist fund manager Riverstone.

Hunting managed to pick up £626m (C$1.27bn) for this asset. Again, this deal was struck at a healthy multiple of nearly 13 times the business’s £48.4m operating profits last year. That reflects the booming nature of its activities too – operating oil terminals, pipelines, road tankers and a refinery.

Notably, some of the other major buyouts this year have also involved somewhat recession-proof businesses, such as oil services group Expro, bought by Candover for £1.8bn, and healthcare mobility aid maker Tunstall, acquired by Charterhouse for £514m.

However, while assets such as these look likely to find a buyer whatever the weather, others are finding the current funding climate more debilitating to their deal making, as the drawn out, and in some cases inconclusive, auctions of Reed Business and Informa have shown.

Overall though, private equity companies remain reasonably positive about investing.

Candover Investments chairman Gerry Grimstone said when announcing first-half figures: “Our portfolio is in good shape, and we continue to believe that this is a good time to invest, with company valuations and debt multiples back to more sensible levels.”

And Dunedin chief executive Ross Marshall, who focuses on mid-market deals, sees “good buying opportunities which are more attractively priced than in recent years”.

Grimstone says that the acquisition of Expro shows that “Candover is very much open for business despite the credit crisis”. Nevertheless he admits that overall buyout activity in Europe during the first half was “significantly lower” than for the same time last year.

The total value of deals done had fallen by 58% to €48bn, because of “a shortage in the availability of debt for the larger transactions that historically have accounted for the majority of the market in value terms”.

He expects the current difficult conditions to persist in the second half. However, as Bodycote and Hunting have shown, for the right asset there will always be buyers.