Recent Spanish deals have included the €2.4bn sale of telecom company Auna’s fixed-line business to a trade and private equity consortium, the €4.3bn purchase of travel reservations firm Amadeus by BC Partners and Cinven, and Apax’s €1.1bn acquisition of bakery company Panrico.
Carlyle Group is also in exclusive talks to acquire hotels group Occidental Hoteles for upwards of €1bn after outbidding trade buyer NH Hoteles, and clothing company Cortefiel is being sold to CVC, PAI and Permira for €1.4bn.
Not all auctions have gone in favour of private equity, however. The resurgence of trade buyers and the implicit cost benefits that they can achieve through synergies were exemplified when France Telecom beat buyout consortia to acquire Amena, Auna’s mobile phone company, for €10.6bn.
France Telecom’s victory in the Amena deal clouds what has been a very buoyant year so far for Spanish buyouts. According to Thomson Financial figures, in the year to August 24, there were 23 announced buyouts compared with 13 in the same period of 2004. Deals have also grown bigger, with this year’s targets totalling US$11.9bn including net debt, compared with just US$652m in 2004.
The auction certainly caused consternation among the competing private equity bidders. The KKR, Goldman Sachs and BC Partners consortium pulled out a week before the France Telecom bid, reportedly because they were annoyed at what they saw as a delay in the process to accommodate the wavering trade buyer.
The majority view is that the Amena deal was a strategic one for France Telecom. It is perceived as a reflection of France Telecom’s determination to acquire a strategic asset, rather than an indication of the wholesale return of trade buyers to the Spanish market.
With only three mobile phone operators in Spain, France Telecom was willing to pay what it took to acquire Amena, said Ignacio Villa, a partner at M&A adviser Closa. “If you look at other deals it’s all private equity,” he said. “For instance, there was no trade bidder for Panrico, Cortefiel and others.”
Amena has not been the only victor for a trade buyer, however. Italian retailer Autogrille acquired duty free retailer Aldeasa, beating bids from Advent and Mercapital. “Again, this was a highly strategic acquisition by the trade buyer,” said Villa.
Villa expects growth in the Spanish market to continue. He estimated that direct equity investment in Spain by buyout firms was roughly 25% up in the first half of this year. “I expect private equity houses to directly invest €2.5bn to €3bn this year, compared to around €2bn in 2004, and the figure for next year could reach €4bn,” he said.
So, what has been driving the activity? There are a number of factors. One is the general economic strength of Spain as one of Europe’s fastest-growing countries, with growth forecast at 3% this year. Another is the sale of family stakes in major companies to avoid succession battles. In Panrico, for example, the controlling family chose to sell its 53% stake.
Partial or total disposals of family stakes will continue to be a major influence on the development of the market.
Alejandro von der Pahlen, who heads Candover’s office in Madrid, pointed out that control of many family companies was now passing to second and third generations, who did not necessarily want to continue running the business. “Private equity is becoming an attractive option for them, as it means they don’t have to sell to a competitor,” he said.
This is compounded by the fact that the public markets window has been closed over the last few years and is not a real opportunity for companies with a market cap below €1bn, according to Jose Basabe, director of ABN AMRO Capital in Spain. Basabe said that secondary buyouts became an alternative in the market since ABN AMRO closed the first such deal in Spain in December 2003, with the acquisition of healthcare company Labiana from 3i.
The market has been maturing ever since. “The market in Spain has been maturing for a while and has accelerated in the past year, moving from capital development transactions to buyouts,” said Von der Pahlen. He estimated that last year capital development accounted for two-thirds of the market, while this year buyouts had been dominant.
Other factors driving the market have included a greater willingness by banks to finance deals, with both Spanish banks and overseas institutions developing or expanding buyout teams.
Benign conditions in the debt markets have been a key factor in the buyout boom. “That’s a factor in other countries as well, but in Spain it’s been heightened by the arrival in the last few years of international banks like RBS, Bank of Scotland and ING building up buyout teams and increasing competition,” said Ricardo de Serdio, a partner at PAI Partners in Madrid.
Basabe agreed: “Financing terms and conditions are more aggressive than ever in terms of leverage ratios, pricing and maturities, with larger bullet facilities available.”
Perhaps the biggest influence on the market has been the number of international buyout firms setting up shop. There are now thought to be 20–30 international houses with local offices, including CVC, Advent, Apax, Carlyle, Permira and PAI.
Alongside the international players are Spanish buyout houses, notably Mercapital and Corpfin, as well as some smaller houses such as Dinamia and Fortis-owned Nazca.
“The international private equity houses are increasingly establishing a direct presence in Spain, attracted by the fact that the Spanish economy and regulatory environment are pretty open,” said Kevin Woods, a partner at advisory firm GBS Finanzas.
Legislation governing buyouts has also been simplified and has become more private equity friendly in recent years, said Candover’s von der Pahlen. What was still missing, he argued, was squeeze-out clauses for public-to-privates, but there is currently a draft law that will bring these in and which is expected to become law next year.
“There are also other legal measures that are quasi-identical to squeeze-out clauses and that have been used to facilitate some PtPs already,” he said.
Private equity competition
Private equity firms face stiff competition from each other as well as strategics for the best Spanish assets.
In the sale of clothing firm Cortefiel, the two rival bidders, CVC and the PAI/Permira consortium, decided to merge their interests and then acquire equal stakes in the company. In an unusual auction, CVC had an agreement with Cortefiel’s controlling shareholder that would allow it to buy the company unless there was a rival offer 8% higher.
However, this agreement had not been approved by other shareholders, which meant that even though the PAI/Permira bid was not 8% higher there was a stalemate and the buyout houses decided to come to their own accord.
PAI’s de Serdio said: “This kind of irrevocable undertaking by a company is very unusual in Spain, so I don’t expect it to become a common occurrence. In this case, it made sense for the two buyout groups to join forces.”
He added that PAI had a track record of working with other investors, although if it could do a deal on its own it would.
PAI is one of the longer established firms in Spain and has already made successful exits. Last December, it sold metal packaging company Mivisa, which it acquired in 2001, to CVC.
The sale, for €520m, generated 4.5x PAI’s initial investment and was the largest secondary LBO at the time. Other recent exits include Nazca’s sale of its stake in private sector mail company Unipost to Deutsche Post and Mercapital’s exit from Cortefiel.
The outlook for the market going forward is positive, as most observers believe that conditions and the wider economy will continue to provide a buyout-friendly environment. ABN AMRO’s Basabe said the financing conditions currently available give an enormous advantage to PE houses when competing with industrial buyers and with IPOs.
“We believe there is a real opportunity of creating value by professionalising the management of companies,” he said. “The current momentum can be maintained for small and middle-market transactions, but we will probably see fewer of the large deals like Amadeus, Auna, Panrico or Cortefiel.”
But with excess funds available from the buyout firms, and continued high availability of debt financing, auctions will become more challenging, he added.
Candover’s von der Pahlen said that the succession of large buyouts this year should not overshadow the growth in small and middle-market deals. He believes that, partly because the Spanish economy was inward looking under Franco, Spain does not have a high number of large companies compared with the UK, Germany, France and Italy. Due to this, and its smaller economy, Spain will probably never be as big a market as the other four countries.
Nevertheless, buyout specialists expect that the current growth will continue, especially with the presence of so many established firms.
Basabe noted that the capital invested in Spain versus GDP was still far below the European average and particularly markets like the UK.
Villa expects continued year-on-year growth in the number of deals, but he noted that in Spain perhaps more than in other countries, personal networks are crucial to generating deals. “It is important to network in the Spanish business culture,” he said.