France continues to retain its position as leader in the continental European buyout market. According to preliminary figures from AFIC, in 2000 total investment in the private equity market reached €4.7 billion and of this total €2.3 billion was dedicated to LBOs. This was a marked increase on 1999s total, which reached €1.1 billion. However, the Centre for Management Buyout Research (CMBOR) reveals total figures for management buyouts and buy-ins down from €8.6 billion in 149 deals in 1999 to €7.2 billion in 119 deals in 2000. Average size of deals grew from €57.7 million to €60.3 million.
The growth of the average size of investment in the French buyout market is due to a handful of large transactions that took place last year. These include the €890 million acquisition of Lafarge Speciality Building Products and the Ffr4.9 billion secondary buyout of MGE UPS Systems, the Metlan-based manufacturer of uninterruptible power supplies. The growth looks set to continue for this year with the Picard mega deal, that took place in the first quarter of 2001, with a value of €920 million, marking one of the largest buyouts in France.
A boom for buyouts
As deals like Picard illustrate, the food sector is a topical area in this market, but there is also a growing number of opportunities in the engineering and building materials businesses. Candover’s Chris Spencer, who was involved in the Picard deal, says the future is still bright for the French buyout sector. “Last year was very good for buyouts, this year could be even better, thanks to a number of changes that are taking place in the French market.” He adds that everyone is expecting a turnaround on January 1 2002, when the euro will be in circulation. This, he says, is another pressure and cause for companies to restructure and focus on their core businesses. There will be real price transparency throughout Europe and this will continue to force companies to sell the aspects of their businesses that they are not very good at.
Another factor that is pushing up the number of buyouts is that it is still very difficult to list on the stock market. In the past large corporations were able to float their non-core businesses more easily, but today, companies are more likely to consider an MBO than go for an IPO. In this respect the secondary buyout has also grown in popularity as a good alternative to an IPO, based on a value-creating, sector-focused approach and development potential. Such deals last year included the Ffr2.3 billion acquisition of Frans Bonhomme by Cinven, Paribas Affaires Industrielles and Astorg; and the Ffr1.479 billion acquisition of shopfitting manufacturers HMY, holding company of Hermes Metal and Yudigar by NatWest Equity Partners, UBS Capital and management.
In March this year Candover announced its mega deal, that it would back the management of leading French frozen food retailer Picard Surgelés to acquire the business from Carrefour, the world’s second largest retailer, in a €920 million transaction. Candover, with Chevrillon & Associés, its French partner, led, structured and arranged the transaction, which involved a consortium of investors committing total equity of €320 million. Candover invested €138 million of equity, Chevrillon & Associés €35 million, HSBC Private Equity (advised by its French office) put in €53 million and Astorg, a French private equity fund committed €27 million. Senior debt and mezzanine financing of €573 million has been fully underwritten by UBS Warburg, with Intermediate Capital Group providing a proportion of the mezzanine financing. In addition, a €27 million vendor loan is in place.
Talking about the deal, Spencer said the whole transaction went smoothly something he does not view as typical of buyouts in the French market. Picard was an extremely attractive business for Candover with an impressive track record of over 25 years’ continuous growth. Spencer also praises an excellent management team, led by chief executive officer Xavier Decelle, who has been at the helm of Picard for over 15 years: “We have backed many good management teams at Candover in the past, but this is one of the best.”
A particular advantage that Candover had over other investors when approaching Picard was its contacts made from its first investment in France, MC International, a leading European supplier of refrigeration installation and maintenance services, that it has since successfully realised in 1999 via a secondary buyout backed by Charterhouse and CDC Participations. One of MC International’s leading clients was Picard. Olivier de la Morinière, the chief executive of MC International, helped the Candover team understand the French frozen food’s market and De la Morinière introduced Candover to Decelle, the chief executive of Picard, giving the firm a good angle very early on for the acquisition.
The key to a successful French investment, says Spencer, is understanding the country and the culture. Being a French national himself, Spencer can speak easily about this. He says: “You cannot do deals in France if you are not French. It is essential to build a relationship of trust with your clients and it is very difficult to do that if you do not have the same reference point.” He adds that it is critical to have a French team that is well connected with the French market and with a good track record, not only to find deals, but to understand the specifics of the market and the opportunities that are out there. For example, he says, looking at Picard from a UK perspective, many people might just see it as a frozen food retailer such as Iceland, but as a French national you would know that this is not the case.
Spencer emphasises the importance of its joint-venture partner in France, Chevrillon & Associés, with whom Candover worked on both the MC International and Picard deals. Chevrillon & Associés, says Spencer, is extremely well connected to the French circle in Paris. It is through this relationship that the firm has realised how important it is to have its feet on the ground in France and so has decided to set up its own office in Paris. Spencer stressed that Candover will continue to work with Chevrillon & Associés on deals in France.
A mixed bag
The range of players in the French buyout market is mixed with veteran French houses such as Butler Capital Partners, Paribas Affaires Industrielles and BNP Private Equity. They compete with a cluster of well established UK firms that have been operating for a while in the French market, among which are CVC Capital Partners, 3i Gestion, Bridgepoint Capital, and Apax Partners. Deal opportunities are centralised with the bulk of investment concentrated in Paris and a healthy deal flow also coming from Lyon, that is particularly rich in healthcare and biotech opportunities.
Maurice Tchenio of Apax, which sees itself as one of the pioneering UK firms to enter the French market having set up offices there in 1983, says that up to 75 per cent of deals are found in the Paris and Lyon region. Apax last year raised a €720 million French fund which represents almost 15 per cent of monies raised for investment in France in 2000. In each individual country, Apax dedicates at least two thirds of its monies available for investment to buyouts and the remaining third to earlier stage investments.
According to Tchenio the French market is very dynamic at the moment and the buyout in France has become more widely accepted by large corporations as a mechanism to sell their businesses. However, he stresses upon a pan-European approach to investments and adds that the trends seen in the French market are much the same as the rest of Europe: large corporations divesting non-core businesses and creating merger opportunities where private equity houses can play a major role by providing the capital to start the merger.
Tchenio considers legal obstacles affecting the French market and says there is only one current impediment as far as he is concerned and that is regarding the public to private leveraged transaction. In France, in order to consolidate from a tax point of view, you need to get hold of at least 95 per cent of the shares of a company. So to be successful you need already to have investors in the company that own at least 60 per cent to 70 per cent of the shares. This is a factor that is preventing the development of public to privates. However, they do exist. This has been the result of two factors, says Eric Adjoubel of Advent International. Firstly, the overall outlook of midcap companies has had to change with the general internationalisation of businesses throughout Europe. Secondly, there was a time a few years back when companies tended to go public for very little reason. They listed to sell their stock, rather than to raise money and are now realising it is expensive and difficult to raise money and hence are going private.
The public market has thus become a hunting ground for private equity houses, but the number of deals is limited. One of the few to come through recently was the €420 million buyout of railroad equipment manufacturer De Dietrich et Cie by ABN AMRO Investissement France. The offer was conditioned upon at least 50.01 per cent of the company’s shares being tendered on a fully diluted basis.
Advent international, with CVC Capital Partners and The Carlyle Group was involved in one of major transactions of last year – the acquisition of a majority stake in Lafarge Specialty Building Products (LMS) for €890 million. The three funds have each acquired equal shares in the business that has been renamed Materis. Lafarge continues to retain an economic and strategic interest in Materis and has reinvested 33.3 per cent of the equity. The buyout includes the sale of five of the seven businesses that make up Lafarge’s Specialty Products’ division: the manufacture of specialty cements/mortars and the paints’ division, which is being considered for divestment. These businesses recorded sales of €930 million in 1999, with 4,500 employees worldwide and approximately 50 production facilities.
CVC, Advent International and Carlyle have defined a structure and operating method that is both efficient and compatible with Lafarge’s corporate culture. The new majority shareholders will bring their experience of managing industrial build-ups to the new industrial project perfectly in line with LMS’s strategy. The Royal Bank of Scotland and Schroder Salomon Smith Barney provided €865 million of senior debt and subordinated debt for the transaction. Individuals leading the deals at each equity house were Eric Adjoubel of Advent in Paris, Bernard Finet of CVC Capital Partners’ Paris office and Jean-Pierre Milet of Carlyle Europe.
France continues to be a healthy market for buyouts: there is an abundance of deals, prices are going down and there is plenty of money available. However, market professionals are complaining that many deals are not getting done as private equity houses are trying to drive prices down, while the seller is a large corporation and won’t sell for a low price. The market should nevertheless continue to grow thanks to two main drivers. Firstly, large, listed corporations are under pressure from their shareholders to concentrate on their core businesses. And secondly, the French market in general is looking towards a stability in terms of growth and inflation and also interest rates which are forecast to come tumbling down.