All the noise surrounding the recent trend of public companies spurning private equity bids has missed a particularly important point: what happens when a private equity firm can’t get its own way.
For a possible answer, check out Apax’s big story this month. Despite the firm’s protestations to the contrary, just about everyone else agrees that its €1.7bn move for Swedish healthcare group Capio is an attempt at a hostile takeover, and if we are to take the spate of rejections of private bids as a sign that listed companies are locking arms and engaging in a spot of collective resistance against private equity, then Apax, along with co-investors Nordic Capital, is sounding a claxon declaring that it’s prepared to play hard ball.
Private equity firms have traditionally been reluctant to take this approach – whereby a bidder bypasses the normal route of approaching the management board first and goes straight to the shareholders – and investors have inserted clauses into fund documents preventing the GP from going hostile. However, with access into the top-performing funds now an issue for LPs, firms have been able to eradicate such a stipulation.
The banks too are being forced to change their tune. Because due diligence isn’t possible in a hostile, banks traditionally have been very cautious about backing such a deal, but with lenders falling over themselves to give their money away, it’s the private equity funds that are now calling the shots. Bank of Scotland and Barclays have already been mandated to arrange the financing for the Capio bid.
It’s not as if private equity hasn’t tried to appease shareholders who are reluctant to sell. Apax has twice – House of Fraser and ITV – had sweeteners turned down. One solution that is expected to rise in popularity when a bidder is faced with the problem of recalcitrant shareholders is the bear hug. A bear hug is when a bidder offers a price well above the target’s valuation, essentially forcing the management to accept and recommend the offer because they are legally obligated to work in the best interests of their shareholders.
Apax should be no stranger to the bear hug, having supposedly used it when they acquired for Greek mobile operator Q-Telecom alongside Texas Pacific Group (TPG) for €350m. It worked and will no doubt prove to be popular going forward, but a rise in hostiles cannot be discounted. Even if the takeover attempt of Capio is not hostile, it is certainly aggressive – the board said it was “surprised that Opica [the investment vehicle] has proceeded with its unsolicited offer.”
The move also comes at a strange time for private equity when the industry is desperatley trying to improve its public image. But with so much money sitting in funds the public market is an inevitable destination for the mega-funds, as the largest companies are typically listed ones. If public investors are now beginning to believe they can achieve the same sorts of results as private equity and are more likely to reject bids, then an increase in hostiles seems assured.