Friday Letter: A tale of two buyouts

A new era has dawned in South Africa, where Bain Capital is preparing the country’s largest ever LBO. Meanwhile in the UK, a private equity bid for Sainsbury’s looks an increasingly tall order.  

Bain Capital is about to write the equity cheque for its $3.5 billion deal for South African retailer Edgars Consolidated Stores, the largest buyout ever recorded in the country.

The US-based firm is offering to pay a whopping 51 percent premium on the share price on October 16, the day before Edgars said it was in talks about a potential deal. Edgars said the bid offered shareholders an attractive exit option.

The retailer’s board had from the outset been looking for owners that might be more appreciative of its charms than its public market shareholders. But in contemplating a switch into private ownership,  it ran the risk of igniting the debate that is now dominating headlines all round the globe. Paraphrased and applicable to a quoted stock near you now: private equity firms are eating our lunch.

The position is particularly acute in South Africa, where Edgars’ departure from the stock market marks the latest in a growing rush for the exit. Consol, its price bid up 50 percent, will soon enter Brait’s private equity portfolio. Shoprite Checkers will probably follow, despite opposition from minorities. 

If all these deals are finalised, about R55 billion (€5.9 billion; $7.7 billion) will be wiped off the 120-year-old South African exchange’s market capitalisation. That’s not much in the context of the current total market cap of R5.1 trillion, but it will leave the JSE a less diverse market than it once was.

Edgars’ board is unambiguous, however. Its immediate future is off-market: “[Edgars] recognises that although its prospects remain positive, its future performance and corresponding growth profile are not without risk. The rationale for the offer is to provide shareholders with the opportunity to realise significant value for their investment.”

Bain is unapologetic, too. It has paid a full price. It is not sneaking away with anything. Edgars is a growth story that only a few firms with a global footprint have the firepower and the gumption to back.

The takeover seems to be predicated on the idea that an emerging South African middle class with an appetite for shopping constitutes a tremendous opportunity – which the current owner failed to appreciate: according to a source, the public market never got to grips with Edgars’ credit card business. (Cynics might observe that an understanding of debt is of course a speciality of private equity).

But this is also a great show case for the buyout community to demonstrate how strong its investment model can be, while in other markets the take-privates are under heavy fire.

As for Edgars’ future, it seems highly likely that Bain’s exit will ultimately come via a flotation back on to the markets. Grow the business, grow the market and more opportunities will flow.

It is all a far cry from the cat and mouse game playing out in the UK around private equity’s interest in retailer Sainsbury’s. Here, scepticism and speculation prevail. Opportunistic investors are piling into the stock to capitalise on a possible buyout, ramping up the share price and reducing the likelihood of a bid materialising. They want to make a turn and watch the buyout firms sweat for theirs. In the meantime, trade unions and other vested interests stoke the fires of discontent at the buyout consortium’s alleged rapacity.

Truly it is the best of times and the worst for global private equity.