U.K. Taking-Privates Taking Patience

Private equity groups operating in the U.K. are struggling to impress these days.

Take the case of HMV. The London-based music and books retailer was approached by Permira in January with a taking-private offer of around £762 million. HMV dismissed the proposal within days. Permira then retooled its bid and came forward with a £843 million ($1.49 billion) offer in March, but was again shown the door.

Scenarios similar to that of HMV are playing out all over Europe, particularly in the U.K. According to Thomson Financial (the publisher of Buyouts), there were $84.7 billion in failed bids for European companies in the 2006 first quarter, a considerable climb from $17.5 billion of failed deals logged in the previous three-month period.

Private equity rebukes were a large part of that number, as European dealmakers endured rejections throughout the market. To wit, private equity flirtations with broadcaster ITV, ports operator Associated British Ports, and retailers House of Fraser and Kesa Electricals all fell on deaf ears.

“All foreplay and no finish,” is how Barclays Private Equity Co-Head Tom Lamb describes the current proclivity for rejection. He tells Buyouts that part of the trouble firms are having comes in part from their past instances of success.

He cites the example of Debenhams, which was taken off the public markets in 2003 by Texas Pacific Group, Merrill Lynch and CVC Capital Partners, only to be refloated earlier this month in an IPO. Reportedly, the firms had already taken out over £1 billion in proceeds through dividend recaps prior to the floatation, and in the IPO also unloaded around 487 million shares at a price of 195 pence per share, which would translate into another £950 million in

“There have been certain examples where shareholders have had it rubbed in their noses when private equity firms buy a company and a couple years later turn around and float the business at a huge profit,” Lamb says.

The idea that the smart money is buying is the primary reason for pause among the public stockholders, but there may also be reticence from a company’s management to open the books, as there is a fear that should negotiations fizzle there is the potential for fallout.

The wrangling between Apax Partners and Woolworths is one instance that may be fresh on the minds of many targets. Apax, after months of negotiations, floated an offer to buy Woolworths for 58 pence per share. At that point, the company gave Apax access to its books. A few months later, following what the firm called “intensive commercial due diligence,” Apax pulled its bid saying it was “unable to confirm certain key cash items.” Not surprisingly Woolworths’ public shares went in an ensuing free fall and the retailer’s stock has yet to fully recover.

As buyout shops build up their war-chests, there is some worry developing that there may not be enough acquisition targets to accommodate. The collective brush-off from the public market has only heightened this fear.

However, Lamb does not anticipate that this will be a long-term issue. He notes that the stock market has enjoyed somewhat of a revitalization in recent months, and that once things turnaround, public companies will be as receptive as they once were.

“There will always be some sort of economic downturn, and when the tide goes back out, that’s when people find out who’s not wearing their swimming trunks.” —K.M.