In this, the first in a series of biannual articles, we look at the driving forces behind the surge in public to private transactions over recent years and examine public to private activity in the UK during the first half of 2001 and the resulting premiums that management teams and private equity backers have been prepared to pay. The survey focuses on completed buyouts of UK or Irish target companies, with either full London or AIM listings and looks at the average premiums paid over the target share price one day and one month before the offer or bid talks were announced.
The late 1990s saw a resurgence in the number of small- to mid-cap companies which, fed up with the lack of interest from the City of London and the resulting lack of liquidity in their stocks, were open to approaches from private equity backers. Faced with the tech stock love affair that was going on at the time, companies operating in the more traditional industries such as manufacturing and engineering could no longer see the benefits that a listing held for them. The prospect of the ease with which capital could be raised had originally brought them to market in the first place, so with this attraction now gone, the prospect of maintaining a stock market listing, with all its costs, rules and limitations, seemed nonsensical. At this point, in stepped the private equity backers with ways of realising value from their undervalued stocks and there began one of the most talked of M&A trends of the last decade.
The rate at which the public to private (PTP) option was embraced by suffering firms is staggering. In 1997, eight per cent of all completed UK public takeovers were PTP’s. This figure rose to 16 per cent in 1998 and subsequently in 1999 and 2000, public to private activity comprised 21 per cent and 22 per cent, respectively, of all UK public takeover activity.
The (general) need for PTP offers to be agreed, has ensured that the premiums paid to obtain 100 per cent ownership and shareholder backing has generally been high compared to those paid in trade sales. These have in turn, in many quarters, bolstered the overall average UK bid premium figures. That said, like so many trends, the novelty has worn off over time and while the volume of PTP transactions remains undiminished, the premiums that are being paid have plummeted.
In terms of the average premiums that have been paid to return firms into private hands recently, the average one day and one month premiums have dropped from 63 per cent and 65 per cent, respectively, during the first quarter of 1999 to 51 per cent and 58 per cent by the fourth quarter of the same year. This decline continued and by the end of last year, the fourth quarter average one day and one month premiums had fallen to 42 per cent and 49 per cent, respectively. We have also seen some staggering differences between average PTP and overall survey premiums of late and the accompanying table shows the differences between the PTP and overall average premiums on a quarterly basis over the past two years.
This year has seen the average PTP premiums plunge even further. The first quarter produced average one day and one month premiums of 26 per cent and 37 per cent, respectively, but these were to go even lower during the second quarter, when the equivalent average premiums fell to all time lows of 19 per cent and 24 per cent.
Despite the expected fall in the average quarterly premiums, the overall volume of disillusioned firms reverting to private company status remains predictably high this year. Of the 47 UK public company takeovers completed to date, PTP offers comprised 38 per cent. As long as the Global lull in the M&A market continues the problems for those undervalued firms will be compounded. It is only natural that they will look for more cost effective and efficient financing structures and cut themselves free from the restrictions that a listing imposes.
The highest one day and one month premiums paid on a PTP offer during the first six months of the year were paid for Nightfreight, the Birkenhead-based freight service provider. Barclays Private Equity backed the management-led group, Ewenny, on its GBP35 million offer, paying one day and one month premiums of 54 per cent and 85 per cent, respectively. Shareholders were offered 69 pence per share for the company, which had ventured onto the stock market in 1994 and had just posted a small increase in pretax profits to GBP4.5 million for the year to the end of November, up from GBP4.1 million the previous year.
The GBP106 million offer by Swan Capital Investments for Mid Kent Holdings, the Kent-based water utility, resulted in the second highest one month premium between January and June. Swan, which was backed by WestLB Panmure and founded by chief executive Keith Tozzi and finance director Robert Atwood paid a one month premium of 49 per cent, alongside a one day premium of 20 per cent. The price cuts recently imposed by industry regulators had forced Mid Kent and others within the sector to look at issues such as cost of capital and assess whether a stock market listing was really still a feasible and worthwhile alternative.
Variations in the PTP deal values during the first six months were substantial. Offers ranged in size from the GBP13.4 million offer by Mainstream Commerce, a management-led vehicle for BLP Group, Doncaster-based wood product manufacturer, which was concluded for one day and one month premiums of 46 per cent and 44 per cent, respectively, up to Thayer Properties’ GBP920 million offer for London-based property firm, Burford Holdings. Thayer, backed by Lehman Brothers paid one day and one month premiums of 15 per cent and 18 per cent, respectively. Overall, six of the 18 companies taken private during the first half were done so for offers in excess of GBP200 million.
The real estate and property development industry lost the greatest number of listed representatives during the first half of the year. Eight out of the 18 firms that chose to go private were players in this field and included firms such as Delancey Estates, Regalian Properties, Barlows and Moorfield Group. The sector average one day and one month premiums during the first half of the year were 19 per cent and 21 per cent, respectively. Within the industry, General London Constructors (GLC), paid the highest premiums on its GBP307 million offer for Middlesex-based residential property developer, Fairview Holdings. GLC, a 3i-backed management-led consortium, offered one day and one month premiums of 41 per cent and 48 per cent, respectively, on its 180 pence per share offer which completed in January.
The buyout of Fairview, which was spun-off from Hillsdown Holdings in 1998, was the second 3i-backed PTP deal in as many months, following on from the GBP223 million buyout of Peter Black Holdings, which was concluded in December last year.
How will the currently subdued M&A market affect the level of PTP activity?
If average premiums continue to drop over the next six months, will there be a point where management teams who are considering their firms’ futures as listed companies feel that it is a case of better the devil you know’?