Spain gets tough

While Spain has experienced high levels of buyout activity this year, the possible acquisitions of airline Iberia and tobacco business Altadis could push volumes up dramatically.

A consortium including Texas Pacific Group, British Airways and Spanish private equity houses is among those seeking to acquire the listed Iberia, in a deal that could be worth €4bn. Meanwhile, CVC is thought to be seeking another partner in its proposed €17bn acquisition of Altadis, following PAI Partners’ withdrawal.

Consortia acquisitions, as in the mooted Iberia and Altadis transactions, are becoming more common, says Jose Maria Balana, a partner at law firm Lovells.

“We’re seeing more private equity houses get together to make bids, which is a relatively new phenomenon here,” he says.

One of the main reasons for this, Balana says, is the rise in prices as a result of fierce competition and a limited supply of assets.

The high prices being paid in the market are reflected in recent deals, such as the sale of Catalan supermarket chain Caprabo. The company was acquired by trade buyer Eroski, which beat rivals including Permira but had to pay a reported €1.3bn for its majority stake. Initial estimates were that the company would fetch €800m to €1.2bn.

“Spain is one of the most competitive markets in Europe and that’s pushed up prices significantly,” says Jose Maria Maldonado, who heads Bridgepoint in Spain. He adds that there still continue to be newcomers to the market, who are all desperate to close deals, and renewed activity by some trade buyers.

“People are paying 13–14x Ebitda and not every company is worth that,” he says: “It’s easy to buy at 14x Ebitda but harder to return 3x money to investors.”

Among the new players last year were Candover and Doughty Hanson, and both have done significant deals in Spain since their arrival.

In January, Candover agreed to buy leisure park operator Parques Reunidos from Advent International for about €900m. Advent had acquired the company in December 2003 for €240m and invested €266m in new acquisitions and facilities.

At the end of 2006, Doughty Hanson acquired bus company Avanza for €660m. It then teamed up with Spanish firm Mercapital to bid for another bus company, Continental Auto, but was beaten by UK trade buyer National Express.

Lovells’ Balana says that even though prices are high, people are willing to pay them because they can still access reasonable financing in the market. “Interest rates are up slightly, but still okay and the leveraged part of transactions can be financed at current levels,” he says.

As well as concerns about valuation levels, there have been some uncertainties expressed about Spain’s economy. In the last decade it has been one of Europe’s star performers, outstripping eurozone growth levels every year. Growth continues to be strong, coming in at a higher than expected 4% annualised rate in the first quarter.

But a slowdown in the growth of property prices and higher interest rates could signal a less rosy future, given that the booming property and construction sectors have fuelled much of the growth. A major article in the Economist last month [May] questioned whether the Spanish economy was heading for trouble.

“Articles like that have been creating quite a bit of controversy, but I expect a soft landing for the property market rather than the crash that some parts of the US market have experienced,” says Balana.

The property market is important, however, with house building representing up to 10% of GDP. Construction companies have been the engine behind the expansion of Spanish companies abroad and much of the M&A activity, although many are now diversifying into other sectors.

Javier Macia, a director at Madrid M&A advisory firm Closa, says: “Pure real estate companies face harder times, but the future is healthier for those construction companies that have diversified into other sectors. Construction and real estate now only make up about a third of the business of some of these companies.”

Kevin Woods, a partner at Madrid corporate finance adviser GBS Finanzas, says he expects the buyouts market to ease in the medium term but that activity is likely to remain high until the middle of next year.

“We think the market will then begin to slow because of disinflation in the property market, foreign investors in the stock market gradually looking for other markets and some of the Spanish equity funds also diversifying out of Spain,” he says.

In the short term, it is the Iberia and Altadis deals that are attracting most attention. As well as the TPG-British Airways consortium, there are believed to be other national carriers interested in acquiring the company, although BA has been Iberia’s preferred acquirer, given that BA owns 10% of the airline.

Lufthansa is thought to be one potential bidder, though it has said the price being asked for Iberia is too high. Apax is thought to be seeking a trade partner, such as Lufthansa, or KLM-Air France, to make a bid. Apax would probably have to sell its 21% stake in low-cost airline Vueling, a competitor to Iberia’s budget airline Clickair, to be a credible bidder.

Meanwhile, Franco-Spanish tobacco giant Altadis has been the focus of a bid by the UK’s Imperial Tobacco, which was rejected. CVC and PAI had joined forces to make a bid that trumped Imperial Tobacco’s but last month [May] PAI withdrew, apparently due to disagreements about how to share control. CVC was reportedly proposing to control 40%, leaving PAI with 30% and the rest with other Spanish and French investors.

Both the Iberia and Altadis deals will be PTPs, which have not been very common in Spain. This has been due, in part, to the lack of appropriate legislation, says Lovells’ Balana.

“It takes a lot of time and money to do take-privates in Spain because the rules are very complex,” he says, but adds that new legislation is being planned that will simplify the process. “A draft law has been published but we are currently awaiting the new regulations, which will describe how take-privates can be done in the future,” he says.

Javier Macia says: “We’ve only had a handful of PTPs in Spain but, because of the shortage of assets and the huge sums of money in the buyout market, it’s inevitable that firms will look for new sources of deals, such as the stock market.”

If it becomes easier to carry out take-privates, it may help to address the shortage of buyout targets in Spain. Another factor that could help would be if more of the country’s family-owned companies sold assets. Balana believes this is beginning to happen, even in Catalonia, which has traditionally been resistant to private equity.

He points to transactions such as the 2005 sale of bakery group Panrico to Apax and the sale this month [June] of family-owned Catalan supermarket chain Caprabo. Although the supermarket eventually went to a trade buyer, Permira was very close to acquiring it.

Other possible deals in the pipeline include Logista, a logistics company owned by Altadis, which is likely to be sold off if Altadis is acquired.

Applus, a vehicle inspection company, is also likely to be acquired. Last summer Candover failed in a €915m bid for the company, which is owned by Sociedad General de Aguas de Barcelona. There is some talk, however, that local authorities in Spain may try to back an acquisition of Applus that keeps it in Spanish hands.

Other probable deals include the airport handling business of diversified construction company Acciona, which could go for €400m. Bridgepoint and 3i are thought to be preparing bids and there will probably also be trade buyer interest.

Acciona is also expected to put up for sale Trasmediterranea, a major shipping company it acquired in a privatisation. There is a clause preventing the sale of Trasmediterranea until the end of this year but there has already been interest expressed in it by domestic and international buyers.

There is also likely to be further activity in the hotels sector. Some of the diversified construction companies are investing in this sector and Dinamia, a Spanish buyout fund, is expected to exit by the end of this year its investment in High Tech Hoteles, a chain of three and four star hotels.

The wider picture for the Spanish private equity market is that there is likely to be uncertainty ahead, given the slowdown in the property market and rising interest rates. Whether the buyouts market will continue to boom, thanks to the huge availability of debt and equity financing and lack of target companies, or whether there will be a slackening remains to be seen.

Kevin Woods argues that the economy is robust enough to withstand the problems ahead, saying: “I don’t see any disaster looming, but I do see a slowdown and it’s true that the political environment is less certain than it could be due to the Basque separatists ETA ending their truce.”

He notes that a number of funds specialising in distressed situations, such as Arques and Platinum, have been visiting Spain in recent months to analyse the market. This interest, he says, does not necessarily mean that those funds expect major economic problems but clearly a downturn would offer them significant opportunities.

Javier Macia of Closa says the jury is out on whether, and to what degree, today’s heated market will continue.

“It’s a very active market at the moment and has been for the past couple of years,” he says. “Nobody is sure if we’re at the end of the party or the beginning, as prices have risen sharply, but there’s still a lot of money that funds need to deploy.”