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Strained times at Morgan Grenfell PE

Prospects for the usual rate of investment return appear shaky for Morgan Grenfell Private Equity’s (MGPE) euro1.5 billion fund, known as Deutsche European Partners IV (DEP IV), less than a year after the fund closed.

This is because when DEP IV exited an investment in SLEC Holdings, the holding company for Formula One, it took a mixture of cash and shares from the purchaser. The fact that the purchaser of DEP IV’s 12.5 per cent holding in SLEC was the Neuer Markt-listed EM TV & Merchandising has caused the problem.

EM TV’s share price has plummeted from euro95.6 on the day prior to the announcement that DEP IV was selling its stake to EM TV – March 21, 2000 – to as low as euro5.2 on January 25, 2001. In real terms this means a payment in shares assumed to be worth around euro230 million is now worth less than 10 per cent of that figure. The cash value of the sale realised DEP IV around £113 million, against a purchase price of around £166 million, leaving something of a shortfall.

MGPE’s problems started to become clear when in October last year EM TV announced that its first half-year earnings for 2000 had been overstated. EM TV’s share price fell by around 20 per cent. This was the start of a long descent encouraged by news that Bernie Ecclestone, Formula One owner, held an option for EM TV to buy another 25 per cent of SLEC for around $1 billion. This was followed by the news that an EM TV shareholding grouping is filing criminal complaints regarding the EM TV board.

The problems at EM TV started to come to light some six months after it had bought, in total, a 50 per cent stake in SLEC Holdings. Whereby prompting the obvious conclusion that the 2.5 million shares DEP IV received for the sale of SLEC Holdings were subject to a lock-in period. The terms of this lock-in have not been revealed but if MGPE is now in a position to sell the shares are worth so little it looks advisable to wait and see how EMTV extricates itself from its present dilemma.

US private equity house Hellmann & Friedman may yet save the day. It is rumoured to be bidding to regain control of at least part of the 50 per cent in SLEC that EM TV owns. Hellmann & Friedman sold a 37.5 per cent stake in SLEC to EM TV at the same time as DEP IV sold its 12.5 per cent stake. Morgan Grenfell Private Equity has been said to be in the frame for such a deal. But that looks unlikely if only given that the DEP IV has just euro400 million to play safe and sure with and that the SLEC investment has in truth been a bit of a headache for MGPE from the start. At the outset MGPE is understood to have invested in the Formula One business with the eventual aim of floating it and to this end wished to hold a 50 per cent stake. The missing 37.5 per cent of MGPE’s desired 50 per cent is understood to have been sold to Hellmann & Friedman, by Bernie Ecclestone, without prior, and legally required, consultation with MGPE in February this year.

If Hellmann & Friedman doesn’t get further involved than a rival German media group, Kirch, may sort out a deal with EM TV. What effect this turn of events will have on the overall performance of DEP IV is too early to tell. The fund is euro1.1 billion invested currently and, including the SLEC/ Formula One exit currently causing problems, has made two other, profitable, exits. These involve an investment in Vianova Resins and another in Giraudy, which achieved over two times and three times the original investment, respectively. Vianova Resins was bought from Hoechst in October 1998 for $472 million and sold in November the following year to Solutia Inc for $640 million. And Giraudy was bought from Europe One Communications for $232 million in March 1999 and was sold the following March to TDI, a division of Infinity Broadcasting, for $400 million.

Other high profile investments in the DEP IV portfolio thought to be performing to plan include a 81.5 per cent stake in Italian motorcycle manufacturer Piaggio, Spanish biopharmaceutical company Groupo Grifols, and UK betting company Coral. Together with Texas Pacific Group the total stake bought in Piaggio was 90 per cent at a cost of $751 million, in Groupo Grifols a 34 per cent stake was bought, and in Coral a 100 per cent stake was bought for $656 million.

What is certain is that the MGPE team must be working double time at the moment. Over euro800 million of the euro1.5 billion DEP IV fund has been raised from investors new to MGPE and within a year of the fund closing reports of major losses on the fund and strained relations between staff at MGPE are rife. No doubt any differences of opinion as regards a resolution to the current problems is heightened by the fact that euro13 million of this fund was raised from MGPE staff.

Certainly it would appear that plans for Morgan Grenfell Private Equity to progress its own management buyout from Deutsche Bank, that has been dragging on since last summer, are likely to have ground to a halt. Presumably disgruntled parties are unlikely to feature if the plans are reactivated at a later date.