A spate of public-to-private deals have been announced since last autumn. Activity in this sector of the buyout market has quickly gathered momentum in the wake of Electra Fleming’s role as white knight to William Cook, taking the company private early last year in the face of a hostile bid from Triplex Lloyd, and DLJ Phoenix Private Equity’s acquisition of CE Heath in June 1997.
Starting with Alchemy’s GBP76 million recommended offer for engineering group Wellman last December, seven private-equity backed public-to-private transactions with a total value of nearly GBP450 million (ecu 690 million) have emerged.
NatWest Equity Partners led the buyouts of door-to-door houseware group Betterware and out-of-hours GP services agency Healthcall, respectively valued at GBP117 million and GBP50.1 million; Morgan Grenfell Development Capital is taking another specialist engineering group, B. Elliott, private for GBP43.5 million; Industri Kapital has teamed up with Intrum Justitia’s main shareholder, Bo Goranson, to take the debt collection agency private in a GBP126 million cash deal; Phildrew Ventures led a public-to-private buyout of JLI Group that valued the food processor at GBP25.3 million; and Cornerstone Equity Investors paid GBP14.2 million to take printed circuit board manufacturer Kode International private.
The basic rationale for public-to-private deals, as for any other private equity transaction, is the belief that there is inherent value in, or the potential to add significant value to, a company that the wider market has not perceived. Theoretically, given the “efficiency of public markets” argument, this should not be the case with publicly quoted companies. However, this a theory does not always match the facts.
As the UK stock market continues its upwards surge, many smaller cap companies are feeling neglected, unloved and undervalued. Temporary operational difficulties can have a disproportionate impact on the share price of smaller quoted companies, and since analysts in general concentrate on the more glamorous larger stocks, small caps find it hard to reverse negative investor sentiment.
A preponderance of low valuations below the FTSE 250 threshold, combined with high prices currently being paid in the private company market, have created a “value window” that the private equity industry has been quick to seize.
Although a public-to-private buyout inevitably involves paying a heft premium to the market price (typically between 50% and 70%), it is, by definition, a premium over a price which the buyer believes is a significant undervaluation.
The differing perceptions of value in the public markets and among private equity acquirors are not necessarily anomalous; a private equity buyer taking a substantial majority holding in a public-to-private target will be in a better position than a disparate group of institutional shareholders to implement the measures necessary to secure optimal performance of the business.
The trend for public-to-private deals represents a significant expansion of the UK private equity industry’s sphere of operation at a time when finding value in the private company market, particularly at the larger end, is increasingly difficult. Some observers predict 50 or more small cap companies could be taken private during the course of this year. Unless trade purchasers follow venture capitalists’ lead and begin to seek value among the smaller cap stocks, private equity houses appear, for the time being, to have found themselves a relatively clear field.