New research on the potential competition advantages of joint bids between private equity and trade buyers has come out as the trend looks to be on the increase.
Spanish construction and infrastructure business Grupo Ferrovial has said that it wants to be part of a bid for UK airports operator BAA and the group’s statement sparked a rapid surge in BAA’s share price.
Market speculation immediately focused on whether funds managed by Australia’s Macquarie Bank would be a possible joint bidder, with other names in the frame including Singapore state investment vehicle Temasek and Canadian pension fund Caisse de Dépôt et Placement du Québec.
At the moment, it is not clear whether Ferrovial intends to take a majority stake, but lawyers are reporting growing interest from strategic buyers in teaming up with private equity players. Frustrated by competition rules in consolidating sectors that make it difficult for them to buy their direct competitors, trade buyers are seeking financial partners to take controlling stakes in those businesses.
The argument goes that, if a trade purchaser predicts that its purchase of a target will be blocked, it may not even consider the transaction further. At this point it could turn to a buyout house, which would take political control of the company and alleviate the competition concerns.
While there have been few examples to date, SJ Berwin, the law firm that wrote the report, points to Daily Mail & General Trust’s attempted acquisition of the Telegraph Group in conjunction with CVC as a majority partner.
Simon Holmes, a competition partner at the firm: said: “In sectors where the market is dominated by a handful of players and barriers to entry are high, competition law makes it difficult for companies to acquire their direct competitors outright.
As a result, a number of private equity houses are being approached by trade buyers to be the entity that takes control of the competing company, and to allow the trade buyers to acquire minority stakes in their competitors, in order to reduce competition concerns.”
However, trade buyers that pursue this course of action might not escape competition issues completely as there are still potential issues surrounding the significance of minority holdings, information flows and potential collusion between competitors.
For competition reasons, the industry player might never be able to integrate its business entirely with that of the target. However, by having a partnering agreement the industry player may seek to assert some control over the future ownership of the target and certainly over the timing of its release back on to the market.
While the trade buyer might be able to protect its competitive position within a consolidating market, it is less clear what would be gained by the private equity partner in such a situation. If the deal made financial sense, why would the private equity player dilute its equity by partnering with a strategic investor with its own very clear view of the market?