Warburg Pincus sets ball rolling on PIPE deals

Warburg Pincus is set to take a 10.3% stake in Premier Foods as part of the quoted UK food manufacturer’s £404m capital-raising. The private investment in a public company deal (PIPE) could mark the first of a bout of similar deals as listed companies look to re-equitise.

The private equity firm has committed to a firm placing of £64m, equivalent to 10.3% of the enlarged company.

Overall, Premier is hoping to raise about £379m, net of expenses. Should existing shareholders choose not take up their entitlements in full, Warburg Pincus has committed to subscribe to additional shares that could see it owning a maximum of 20% of Premier.

The fundraising will help Premier, the name behind the Hovis, Mr Kipling and Branston pickle brands, to slash its £1.77bn debt burden. The company has been looking to cut its debt since it secured agreement from its lenders in late 2008 to defer a test in its banking covenants until March 2009.

Crucially for Warburg Pincus, the deal will give the minority investor a seat on the board. The private equity firm hopes that through the appointment of Charles Miller Smith, a member of the Warburg Pincus European Advisory Board, who has 30 years experience at Unilever, it will be able to partner with management to deliver value.

Speculation that a private equity firm would participate in some way in cutting Premier’s debt load has been rife for the last six months.

CCMP Capital, Alchemy Partners and Lion Capital among others are believed to have been in talks with Premier’s advisers, Rothschild and Goldman Sachs, about a possible deal.

Warburg Pincus’s track record of making minority investments in listed companies is believed to have helped it win the deal. More than 20% of the firm’s total investments have been in minority positions in public companies. Moreover, the firm has plenty of capital available, having closed its latest fund on US$15bn in April 2008.

For Warburg Pincus, this looks like a promising opportunity at a time when raising debt for buyouts of any worthwhile size is not possible.

The firm has managed to deploy capital in an indebted business – debt will stand at £1.4bn after the placing alongside reset covenants – in which it has strategic input.

In light of Premier’s strong performance, the deal also looks attractively priced for Warburg Pincus. For 2008, Premier announced turnover and profit growth of 22.5% and 13.5% to £2.6bn and £194m respectively. The capital hike was priced at 26p per share, following a year when the company’s shares had tumbled by more than 75% as investors priced in the threat of shareholder dilution.

Warburg Pincus has undertaken to hold the shares for 12 months. It has also agreed not to launch a bid for the entire company for at least 18 months, and after that six months after it has taken its nominee off the board.

Should the debt markets revive, the private equity firm would be well placed to stage a takeover of Premier, given its familiarity with the company and its minority stake.

The opportunity to acquire minority positions in strongly performing but overly geared public companies is something buyout firms are likely to be looking at keenly in 2009. With non-financial European companies expected to try to raise £267.5bn this year, this space could offer some revival for private equity deal flow.