Not long ago, it seemed that buyout houses had easily eclipsed trade buyers in the competition for assets. After all, the private equity players were able to take advantage of the huge liquidity in the debt markets and were far more comfortable with high leverage, giving them a clear advantage on the prices they could pay.
But some recent transactions suggest that strategic buyers are perhaps making a comeback, not only acting on their own but, in some cases, in partnership with other private equity houses. Sectors such as food and drink, for example, have seen significant activity by trade buyers recently, with Premier Foods and Kerry Group making acquisitions.
Premier has made a number of acquisitions in the last couple of years, with the latest being soup company Campbell’s UK and Irish businesses for £450m in July.
Kerry Group, meanwhile, acquired Indian ready-made meals company Noon last year and was part of a consortium with buyout houses that attempted to buy Birds Eye recently but lost out to Permira. Another consortium for Birds Eye included trade buyer Young’s Bluecrest and buyout houses.
In other sectors too, there has been trade activity. International cable operator Liberty Global was involved in the auction for Dutch cable company Essent Kabelcom last month but lost out to private equity houses Warburg Pincus and Cinven.
Despite these examples, many in the market believe the odds are usually still firmly against trade buyers coming out on top in a battle with buyout houses. There are a number of factors that appear to give private equity buyers an edge in the current market.
One factor is that auctions often have tight timescales that trade buyers find difficult to live with, says Chris Hemmings, head of private equity at PricewaterhouseCoopers.
He says: “Vendors are producing their own due diligence and squeezing auction timescales to 2-1/2 to three months, but most trade buyers don’t have the internal systems and processes to meet that kind of deadline.”
Hemmings adds that when it comes to selling an asset to a trade buyer based overseas, the tight timescales are even more of a barrier.
Simon Havers, managing director for the UK operations of Granville Baird Capital Partners, agrees: “When you’re going from getting a sniff of an acquisition to doing the deal in eight to 10 weeks, most trade buyers can’t move that fast and some would still be organising the board meeting to get approval.”
As a result of this problem, vendors who think trade buyers may be interested in an asset will often sound out the corporate sector in advance so that the timing pressures are mitigated.
The second issue favouring financial buyers is the fact that they can utilise the huge levels of leverage being offered by the banks, which enables them to pay higher prices for assets.
“Often trade buyers are not comfortable with the high levels of leverage financial buyers will use,” says Hemmings. He adds that trade buyers that aim to acquire benefits through synergies often do not want to pay for those synergies: “They feel it’s their contribution to the value of the business and don’t want to pay it over to the vendor,” he says.
Steve Halbert, head of middle markets at KPMG corporate finance, echoes this sentiment. “Trade buyers are generally not comfortable with ratios of five to six times senior debt,” he says. “It leaves them feeling squeezed.”
But trade buyers are still in the market when there is a pressing strategic reason. Mark Barrow, head of private equity coverage at Close Brothers, points to deals such as Deutsche Post’s acquisition of document management company Williams Lea earlier this year.
Barrow says: “For some assets that come up it’s obvious they will go to trade because they’re so strategic. In those cases you’ll probably get three or four trade buyers interested, each keen to prevent the others getting it. In some cases like that it’s almost not worth getting private equity involved.”
But Barrow stresses that in the vast majority of cases it is still private equity that is walking away with assets because it can pay more. “That will continue for as long as there is debt available at current levels,” he says.
According to Mel Sims, a corporate partner at law firm DLA Piper, a number of trade buyers are being successful. He cites examples such as Nippon Sheet Glass’s acquisition of UK glass manufacturer Pilkington earlier this year for £1.8bn. “A lot of trade buyers have the synergies to make deals work and have built up cash,” says Sims.
But he adds that what is different in the current environment is that the larger buyout houses have now built up their own portfolios and can generate their own synergies.
“A lot of the larger houses have been doing consolidation plays and built up quite large portfolio companies driven by buy-and-build,” says Sims: “This makes these private equity houses more similar to trade buyers.”
He adds that in the past two years there has been a marked increase in the secondary market, partly driven by private equity houses seeking to consolidate in sectors such as healthcare.
For example, in healthcare, funds such as Blackstone have been building up impressive portfolio companies, with the house acquiring care homes operator Southern Cross from West Private Equity in 2004, before acquiring the Ashbourne Group the following year, which helped turn Southern Cross into the UK’s largest provider of long-term care beds.
Similarly, in 2004 Alchemy sold its care homes group Four Seasons to Allianz Capital Partners for £775m, with Allianz going on to bolt on other healthcare companies, such as Better Care from 3i in 2005. This kind of consolidation pressure is now occurring in sectors such as food, says Sims.
But the partnering of private equity and trade appears to be particularly popular in the food sector. It was seen in the battle for Birds Eye, when Young’s Bluecrest linked up with CapVest, CVC and KKR, while Kerry Group partnered Blackstone and JPMorgan Partners.
Such partnering is still relatively rare, says Hemmings. “More private equity groups are thinking about it but it’s still not a straightforward transaction to deliver on because there will always be an issue about the long-term investment agenda,” he says, noting that private equity buyers will want to exit at full market value after a few years, while the trade buyer may not want to exit that early.
The rapid pace of auctions today also makes such link-ups between private equity and trade more difficult, due to the difficulties strategic buyers have in moving quickly.
“These kinds of consortia can be made to work but they’re tricky and are still the exception rather than the rule,” says Hemmings: “Generally, private equity houses prefer to own assets 100%.”
Others argue that there can be a win-win situation from both the private equity and trade buyer’s perspectives in such consortia. The trade buyer may want some, but not all, of the company up for sale as a means of achieving synergies, leaving private equity to manage the other bits. Private equity may also be able to increase its leverage on the back of the trade buyer’s involvement, says one practitioner.
There are also sector-specific reasons why trade buyers appear to have been particularly active in some markets. In food and drink, for example, the UK manufacturers have been under great pressure from the supermarkets to keep prices low. Because of this pressure the trade players have been eager to consolidate the food categories they operate in, so as to reduce costs and, gain economies of scale and stay profitable.
While a number of trade buyers have been active recently, the general trend is for private equity to dominate at auctions.
“We’ve seen a number of deals in the past 12 months won by trade buyers but the majority of what we’re selling is going to private equity,” says KPMG’s Halbert.
He adds that the firm was acting for a trade buyer earlier in the year and took it through the tactics that would be needed to compete effectively against private equity.
“Ultimately, the trade buyer withdrew from the process because the private equity houses were willing to bid on a much higher multiple of earnings than the trade buyer,” says Halbert.
He adds that partnering between trade and private equity is much rarer in the middle market than in the larger deals, where there is greater scope for blending synergies and financial engineering.
Simon Havers of Baird says that in his part of the mid-market there has not been a return of trade buyers. “In terms of exits for our investments, we’d welcome them but for one asset we were selling recently we approached trade buyers but their pricing couldn’t compete with private equity.”
He adds that it is not just access to cheap debt that is allowing private equity to pay more for companies but the fundamentals of how private equity operates.
“We have a tighter focus, a better alignment between management and shareholders’ interests, and quicker decision making,” Havers says.
Of five deals in the pipeline for Baird, only one features a trade buyer, he says. “In fact, the people running the auctions often like to say that there are no trade buyers involved because they feel it will encourage us to make higher bids, knowing that our competition is other private equity houses.”
As for the future, there is unlikely to be a widespread return of trade buyers to the market as long as liquidity in the debt markets continues so strongly. Furthermore, private equity will continue to demonstrate its superior approach to running businesses, argue some.
“Private equity is getting bigger in size and scope and more people are now regarding it as a superior model of ownership to that of public companies,” says Simon Havers.
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