Advent International hired two local executives from Dresdner Kleinwort Capital to set up operations in Spain and soon after made a E173m offer for Madrid-listed amusement parks operator Parques Reunidos. The deal closed in 2004, making it Spain’s first private equity-backed take-private. Since then, more international names, such as BC Partners, Carlyle and KKR, have been roaming the market and leading some deals that have hit the headlines. Among these are the KKR-led E12.5bn offer for Auna, the Spanish telecommunications group, and the E4bn-plus BC Partners and Cinven-led offer for Spanish IT travel business, Amadeus. Katherine Steiner-Dicks reports.
“Perhaps, the most important change in the past 12 months has been the number of important LBOs. They have helped to bring new energy to the private equity market and a new awareness of private equity to Spanish institutions,” says José Angel Sarasa, managing partner at Baring Private Equity Partners España.
In 2004, E2.8bn was invested, with the average buyout at about E85m each, according to the Centre for Management Buy-Out Research (CMBOR.) This was Spain’s best year yet by value. Much of the deal flow came from expansion capital and buyout opportunities, but start-ups also received significant funding. Apax, for example, led a E30m private placement for Barcelona low-cost airline start-up, Vueling Airlines.
Javier Loizaga, executive partner at Mercapital, says: “The buyout market in Spain is rapidly coming of age, after years of under development. The number and size of buyouts will continue to be happening in Spain, driven by succession in family-owned companies, corporate divestitures, public-to-privates of dormant public companies and secondary transactions on private equity portfolios.”
Loizaga believes that given the high level of attention the Spanish market has been attracting in recent months, competition for larger deals has increased and has become similar to other European markets such as Italy or France. “In spite of this recent hype due to a few highly visible very large deals (e.g.,eg Auna, Amadeus, Auna), the Spanish market will continue to be largely based on mid-sized, sub-one billion buyouts, where local access and insights are key to value creation,” says Loizaga.
Just as Spain’s private equity market started to gain momentum, the entry of a socialist party in 2004 had investors concerned. Fortunately, the current Government is willing to support VC investment as one of the main drivers of economic growth, according to Javier Morera, a tax partner and member of the private equity team at SJ Berwin in Madrid. “The new Government is pushing forward a new Venture Capital draft bill. The new legislation will provide a greater degree of flexibility to the Spanish VC sector and an improvement on the previous situation,” says Morera.
However, the Socialist Party may propose a substantial increase in capital gains tax rates to put them in line with salary tax rates (now up to 45%.) “It seems that the potential changes in capital gains tax rates might entail a somewhat soft rate increase from the present 15% to long-term gains up to 18% or 20%,” says Morera. The personal and corporate tax reforms are likely to be enforced at the beginning of 2007.
With capital gains in mind, exits in Spain are still sparse, but those that did realise investments over the past 12 months include: 3i (Labiana Group, Segur Ibérica); ABN AMRO Private Equity (Unica); CVC (Grupo Sanitario IDC, Itevelesa); 3i (Labiana Group, Segur Ibérica); MCH/ Corpfin Capital/ Espiga/ Dinamia (Segur Ibérica); Nazca (Unipost); and Suala/ PAI (Mivisa Envases); MCH/ Corpfin Capital/ Espiga/ Dinamia (Segur Ibérica); ABN AMRO Private Equity (Unica.)
Routes to exposure
There are several routes to get exposure to the Spanish private equity market: local funds run by domestic investors; international funds with local teams; international brands with country-specific funds; and international funds that invest from anat arm’s- length on an opportunistic basis. “At present, almost all of the good opportunities lie in the services sector, both for businesses as well as for individual consumers, and in companies with a sales volume of at least E20m, which would mean in our case investing between E5m and E15m,” says Sarasa.
Some funds take a sector-focused or opportunistic approach to Spanish deals, such as GMT Communications Partners, which focuses on media and telecoms. GMT’s deal history in Spain has been heavily centred on proprietary deal flow gained from a local communications entrepreneur. “GMT has had the chance of meeting an entrepreneur, Antonio Sanchez de Leon, who is at the same time entrepreneurial and professional, and we have backed him twice,” explains GMT Communications partner Massimo Prelz.
“After we sold EUSA, an outdoor advertising company, to Clear Channel, Antonio left the new employer, after a certain period, left the new employer to pursue further opportunities in the outdoor advertising market. He then looked at GMT Communications for financial backing. We had worked well with him and we decided to support him through the scouting phase and then in the negotiation,” says Prelz.
He adds: “In general, the landscape in Spain is improving significantly: historically you had the ‘mad entrepreneur’, bright, aggressive and not particularly qualified. Today you start to meet people that have already been through a cycle (i.e.ie grew a business and sold it) and these they are much better prepared, whether as CEO or senior management to work in a private equity environment.” Other prominent players, such as Candover, also have a local deal scout.
The mega- deal arena is dominated by US and pan- European buyout houses with a handful of domestic players also getting involved, although most of these focus on the mid-market. Local players can often get the deals off the ground and get a slice piece of the equity slice through a consortium.
Factors driving the mega- deal flow include large corporate disposals of Spanish subsidiaries that are considered non-core, such as the E685m sale of Ahold’s Spanish food group to Permira and the Pearson Group’s E940m sale of publicly-listed publishing group, Recoletos, to a Providence Private Equity-led consortium. There have been other factors, namely the attractive debt packages for private equity-backed businesses, which have lured heavy weights such as KKR, Advent International, BC Partners, Cinven, CVC, Cinven, KKR and Permira and Advent International. And with take-privates on the rise, bids in the hundreds of millions are becoming more commonplace.
“Large deals of more than E100m in equity undoubtedly breed fierce competition and a large number of auctions which, in turn, produce over-pricing,” says Sarasa of BPEP. “In the middle market, however, the number of transactions is somewhat greater, with less competition, which makes the possibility of securing fair prices more likely.”
“Deals like Auna are few and far between, with there being maybe only one per year,” says Sarasa. “For this reason, the only real significance of deals like these is the sheer volume of funds invested. In BPEP’s case, we prefer to lead deals rather than participate in macro-consortiums. BPEP’s real preference, however, is the middle market, which means we don’t generally consider participating in transactions of this size.”
“Pricing and exit opportunities are, without a doubt, the largest problem facing the Spanish private equity market,” says Sarasa. “Thanks to a basically ineffective stock exchange, the only exit opportunities available are the sale to a strategic investor or a secondary buyout. This fact produces heavily leveraged transactions, which is the only means of guaranteeing a reasonable profit at exit.”
When it comes to secondary buyouts, however, LPs will hopefully reap the benefits of such a liquid debt market. One example could be Occidental, the hotel chain co-owned by Mercapital. Goldman Sachs is handling the sale, which has already attracted 20 interested parties, most of which are private equity firms, including Carlyle, Cinven and PAI.
Alejandro Ortiz, a corporate partner and head of the private equity team at Linklaters in Madrid, says most buyout houses prefer to stand alone, and will invite other LPs to co-invest before considering a syndicate. But when the price exceeds a single fund’s limits, what can often happen is the top two bidders join forces in the end so as not to escalate prices. “There’s more demand than supply in Spain, so sometimes private equity houses share the market,” says Ortiz.
Mid and small market bulge
LPs interested in the Spanish PE market can choose from a wide range of international and domestic funds in the mid and small market. One LP targeting this area is the European Investment Fund (EIF.) Francis Carpenter, EIF chief executive, says the fund has committed E171m in 13 Spanish venture capital funds to date. “The EIF is focusing on the mid-market and start-up phases, covering the innovation and technology chain as well as generalist businesses, in some of the regions,” says Carpenter.
Carpenter says: “Spanish activity appears to be growing apace with strong economic fundamentals;, deal completions show a marked improvement and pricing, particularly in the non-technology sectors, has picked up. This reflects the ‘Spanish VC paradox’: Spain is relatively undeveloped when it comes to technology, but has a wealth of quality intermediaries, which have pushed auctions high on the private equity agenda.”
Since the public market has opened up to private equity takeover bids, the mid-market could see some more take-privates this year, according to Ortiz. The top end of the mid-range is also opening up to financial buyers. Spanish-listed clothing store group, Cortefiel, which is 56% family-owned, may not have considered selling to a VC five years ago, according to Ortiz. But today, the business is contemplating CVC’s E1.4bn offer.
In debt we trust
Beltran Paredes, head of leveraged finance for Royal Bank of Scotland in Spain, has experienced first hand the market’s tremendous growth. Some of the deals his bank has backed include the E582m take-private of Pearson-owned publishing group, Recoletos, and the E4.3bn Amadeus acquisition. “In Spain, multiples are very much in line with those prevailing across Europe, but occasionally above, under specific circumstances. For example, the secondary buyout of Itevelesa, a technical inspection business for the auto trade, sold by CVC to Vista Capital and Apax Partners, had a nine times senior debt package,” says Paredes. Royal Bank of Scotland, Calyon, HBOS, ING and Caja Madrid, Calyon, HBOS, ING and Royal Bank of Scotland were among the debt providers.
Mixed LP expectations
Historically, the biggest LP investors in Spanish private equity have been local banks, government agencies and unknown sources, according to European Private Equity & Venture Capital Association (EVCA) data. According to the latest EVCA figures, in for 2003, E877m was raised for private equity investment in which banks represented 45% of all LPs, with government agencies accounting for 16%, pension funds 3% and unknown sources 2%. Fund-of-funds were some of the biggest backers of Spanish private equity in recent years, but this has only been the case since 1999. In 1999that year, the total reported investment from fund-of-funds was E470,000. That figure jumped to E280m in 2000, the market’s biggest year for fund raising to date (E1.5bn.)
LPs already invested in the market have mixed feelings. “I would summarise our experience of investing in Spain as being mildly disappointing,” admits George Anson, who oversees non-US partnership and direct investments at fund-of-funds investor HarbourVest Partners. “Upon reflection, the lumpy and sporadic nature of the investment environment doesn’t lend itself well to a one-country focus fund. I think the best strategy for private equity investment in Spain is to have it as part of a regional or multi-country fund, but with a local team in place rather like what CVC and Bridgepoint have done. I also think the capital markets infrastructure is not as well- developed as other European countries, and that has not helped, particularly on exits.”