Still not as well developed as its European neighbours, the Spanish buyout market is gaining pace, albeit at a steady rate. Characteristics predicted to boost deal flow include a predominance of family businesses that are competently-managed yet need strategic advice to remain competitive in a global marketplace; expectations of strong economic growth; a stable political environment favouring investment by companies and their owners; and the privatisation of public companies. Angela Sormani reports.
However, cultural differences and language barriers make it difficult for non-Spaniards to generate ventures, perform the due diligence process and carry out investments and there is a strong realisation by newcomers to the scene that, to access the Spanish market, they need a local presence.
One such example is the The Carlyle Group, following the footsteps of fellow veteran player Apax, which entered the Spanish market last year. Last month, Carlyle set up offices in Barcelona and Madrid, following the appointment of Pedro de Esteban, managing director for buyouts in Spain. The investment team currently stands at four, with another two professionals set to join at the end of the year. In Spain, Carlyle will have a particular focus on Spanish family businesses, which represent a significant proportion of GDP in Spain but are reluctant to become listed companies in order to raise further capital for growth. “The needs of a family business are very specific,” says de Esteban. “A strong partnership between investor and family members is key in ensuring that the objectives of both parties are met.”
De Esteban divides Spanish buyout players into three main groups. There are the well-established local players such as Corpfin, Excel Partners (a buyout of Rothschild’s Spanish and Portuguese private equity interests), and Mercapital, which he describes as the grandfather of the business, but that has traditionally focused on growth capital and has only recently started going for the bigger deals. The second category is the international players such as Apax and 3i, who, he says with two Spanish offices in Barcelona and Madrid are the leaders in Spain in terms of completing deals. Finally, the third group are the American players, who until now, says de Esteban have been very inactive. CVC is an exception to this rule with the Revlon transaction last year. “With the change of environment in Spain over the last three to four years, there is clearly space for larger players and hence Carlyle is filling a gap in the market,” he says.
Slow deal flow
In spite of the arrival of these more sophisticated players over the years, the volume of deals in Spain has not significantly changed, says David Bendel, managing partner of Excel Partners. The Spanish LBO market remains relatively immature with few large deals and little appetite among domestic banks to finance LBOs, says Bendel. “Indeed some traditional LBO houses, such as Mercapital, have been forced to invest in development capital and minority situations to absorb their investment capacity. Even 3i is probably doing only four or five LBOs per year.” He adds that the biggest issue slowing growth is the poor image of LBOs in the financial community, due to a lack of the domestic banks’ willingness to finance deals and the lack of entrepreneurial spirit among line managers willing to risk all in a buyout.
While Bendel does not see any legislative issues, other than the social and economic responsibilities that a buyout house faces, Jose Mara alvarez of Spanish law firm, Gomez Acebo & Pombo says there are certain features of Spanish legislation that have affected the growth of LBOs in Spain. This is because Spanish law is not the most accomodating for structuring an acquisition financed by the assets of the target company. Spanish corporate legislation includes rules prohibiting financial assistance, which is holding back the Spanish LBO market.
In spite of these rules, it is still possible to structure LBO operations in Spain without falling within the prohibition set out in certain articles of law. Transactions excluded from the prohibition would be operations in which the management team or the employees of the company participate or those in which the initial loan is repaid by means of the dividends distributed by the target to the new company and, although not admitted by all, those transactions structured by the incorporation of a new company as shareholder of the target company.
Figures reveal that LBOs are being completed in Spain. In 2000, around E314 million was invested in 24 transactions, accounting for 28 per cent of total private equity investments in Spain, says Alvarez. This is a marked increase on the previous year’s figure that stood at E143 million in 18 transactions, accounting for just under 20 per cent of total investment. The introduction of the euro next year will have a significant impact on the Spanish LBO market, says alvarez, as Spanish companies are forced to acquire more dimension in order to compete in a single market. This, he expects, will result in the number of buyouts among small and medium sized businesses increasing.
There are no shortage of funds available for investment in Spain. Funds raised in 2000 tripled to reach euro2.35 billion, according to the Spanish private equity association, ASCRI. This was boosted by veteran domestic player Mercapital’s mega E600 million offering last December, which represented around 40 per cent of generalist funds raised and is the largest private equity fund focused on investment in Spain to date. Mercapital Spanish Private Equity Fund II exceeded its original target of E500 million and is double the size of its first fund that closed on E260 million in April 1998 and is now fully invested.
Javier Loizaga, executive partner at Mercapital, expects this latest fund to be invested within three years. The fund will be targeting Spanish companies that are looking to expand into continental Europe. He anticipates the international expansion of domestic companies as a major source of growth, with average size of deals increasing, as we are seeing across the board in the Europe. From the new fund, Loizaga expects no more than 10 to 12 deals with an average value of between E50million to E60 million. This in itself, he says, is a major development as five years ago deal size in Spain would only have been half that amount.
Spain is a market where most of the deals have to be sourced, says Loizaga. There are a lot of deals waiting to be done and a large number of medium sized companies waiting to find the right partner. With this growing potential and the market getting hotter, he says, the arrival of new players entering the market was inevitable. He views the increasing number of players as a sign of the maturing equity culture in Spain and an elevated profile of the industry as a whole, but whether these players will remain in the market and be successful is another issue.
Deals at the forefront of Spain’s buyout market last year included CVC Capital Partners’ GBP203 million investment in Revlon Professional Products/Colomer Group, manufacturer of salon and retail, hair care and nail products and 3i’s GBP119.45 million acquisition of Grup TCB from Grupo Perez y Cia and Guell Martos Family. Earlier this year, domestic player Corpfin Capital completed the MBO of the waste management company, Grupo TMA for a total value of E72 million. The firm’s three-strong senior management team, all sons of TMA’s founder, have reinvested to take a 45 per cent stake in the equity. Societe Generale has structured and fully underwritten the bank debt in the form of a seven-year loan.
Patrick Gandarias of Corpfin Capital describes the TMA deal as an ideal private equity transaction, a classic LBO with the aim of growing both internally and by acquiring other companies. Corpfin is currently investing Corpfin Capital Fund II, a E125 million private equity fund focusing on Spanish middle-market transactions. With commitments from its second fund, Corpfin is hoping to provide more capital itself rather than relying on co-investment or syndication. Gandarias says of current deal flow, that although professionals are predicting bigger and better deals, the mega deal of this year is yet to be witnessed.
A relatively immature market such as the Spanish one may leave significant scope for development, yet there are many structural aspects such as a lack of large conglomerates and multinational businesses, which professionals maintain will prevent Spain from becoming as big a market as its European counterparts.