European M&A looks to LBOs for dealflow

Two of the largest LBO transactions ever recorded in Europe ensured that July was a record month for activity in the buyout sector, boosting an otherwise flagging M&A market.

The second half of 2002 promises to deliver an upswing in European LBO transactions, following a record level of activity in July which saw the value of LBOs outstrip both previous quarters in 2002.

Multi-billion Euro transactions for Madison Dearborn, which launched a E3.7bn public to private offer for Irish packaging firm Jefferson Smurfit, and Kohlberg Kravis Roberts’ E3.7bn acquisition of Legrand led the way in what was a bumper month for large buyout activity. A total of E15bn was committed to LBOs, ahead of Q2 and Q1, which managed E5.2bn and E8.9bn respectively.

Although it remains to be seen whether the high level of activity in July will translate into a lengthier upturn in activity, the figures will have a positive impact on the annual total for 2002. The July level was nearly three times higher than the monthly average for 2001 (E5.75bn), and August, which already counts Charterhouse’s E1.4bn acquisition of Coral and the E1.8bn purchase by Deutsche Bank and TDC Denmark, the telecoms company, of Cesky Telecom among its early notables, is likely to be another healthy, if not spectacular, month.

However, market participants are sceptical as to whether July’s activity will translate into a strong year end, attributing the increase in activity more to timing than to an upsurge in confidence among fund managers.  Royal Bank of Scotland, which runs the largest leveraged financing operation in Europe and claims to get access to ‘virtually all’ of Europe’s LBO offerings, says the year has not produced a massive range of opportunities. “We haven’t seen a huge M&A pipeline this year and there are only a few major transactions on the horizon for European buyers,” says Jeff Thomas, a director at the bank’s leveraged finance team. “Some firms might struggle to make their budgets for 2002.”

One of the deals set to light up the latter half of 2002 is the Compass sale of hotel chain Travelodge and the Little Chef network of motorway eateries. The sale is already stirring up interest among buyout funds and trade buyers alike, with first round bids to be submitted within the next month. The long list of potential bidders includes French bank Société Générale, leisure group Whitbread, Candover, Charterhouse Development Capital, Nikko Principal Investments and Terra Firma Capital Partners. Initial estimates put the combined value of the two assets at just over E1bn.

The likelihood that July’s LBO activity will not be sustained over the remainder of 2002 should not detract from the enhanced role it has played in European M&A activity this year. Figures from Thompson Financial show that LBOs have accounted for around 11 per cent of the total value of mergers and acquisitions in the region so far this year, the highest figure on record.

Even a slowdown in LBO activity is unlikely to reduce the ratio of LBO transactions as the broader M&A market is set to remain depressed for the rest of 2002. The ongoing asset disposal programmes taking place at debt-ridden multinationals such as Vivendi, which yesterday announced a E10bn disposal strategy, will ensure that private equity firms have rich pickings in the remainder of the year.