Friday Letter: Public vs Private

Knight Vinke Asset Management continues to fan the flames of shareholder resistance to the proposed €7.4 billion private equity-backed takeover of Dutch business information group VNU. It is as though Knight Vinke is enacting a kind of tribute to another institutional investor which took a similar stance not long ago.  

At a private equity conference in Oxford last week, one panellist propounded the theory that the rearguard action currently being fought by UK public company shareholders against certain private equity bids has its roots in Cinven’s buyout of Fitness First, the UK leisure club chain, back in April 2003.

At the time, Fitness First was in less than sparkling health. The previous October, it had issued a profit warning on the back of on over-ambitious expansion programme and simultaneous decline in membership. Most shareholders therefore sprinted for the exits when Cinven’s apparently generous £400 million offer came along.

Everyone sold – except Ruth Keattch, a fund manager at Deutsche Asset Management. Keattch believed the business was flagging, but far from on its knees – and would discover renewed vigour in due course. She believed Cinven’s offer undervalued the business and thus refused to sell Deutsche’s 10.2 percent stake.

Fast forward to September 2005, the month in which Cinven sold Fitness First to fellow LBO firm BC Partners for a princely £835 million, delivering Cinven a reported 3.5 times cash invested. While Cinven had no doubt taken value-adding measures during its ownership, the deal also – so the panellist claimed last week – represented a watershed in terms of public investor attitudes to private equity. It was what you might call a ‘radicalising experience’. Future bids would be met with the kind of sceptical scrutiny applied by Keattch.

Memories of Fitness First have perhaps been revived by the pending IPO of Debenhams, the UK retailer that looks set to deliver around 4.5 times cash to the private equity consortium that has owned the business for around two and a half years. The application of private equity disciplines by a respected, experienced management team has no doubt helped ensure that the business is returned to the market in a better condition than when it left. Nonetheless, suspicion will linger in the minds of some that Debenhams was just another example of a target company that sold out just a little too readily when private equity came calling.

It’s against this backdrop that the likes of Knight Vinke at VNU have dug their heels in. If a higher offer is not forthcoming, the financial bidders will be sent away with their tails between their legs.

But whatever valuations Knight Vinke and its followers are holding out for: as far as private equity is concerned, the offer on the table may well be as good as it gets. Steep competition for assets has been forcing sponsors to offer very full prices for assets for some time, and with rising interest rates driving up the cost of financing, firms are probably already pretty stretched in terms of pricing their offers.

That at least was the view of many attendees at the recent gathering in Oxford. The consensus was that the controversial bids made for UK public companies of late were nothing other than fair and that those rejecting such offers may come to regret it in the course of time.

Now, private equity people would say that wouldn’t they. But unless the alternative value creation strategies purported by dissidents such as Knight Vinke succeed in producing better results than what the financial bidders proposed, the current wave of anti-private equity activism may well come to be remembered as misplaced or mistimed.