Friday Letter: Shipping News

A glossy report from Barclays Private Equity (BPE) was sent to PEO recently, discussing numbers compiled by the Centre for Management Buy-out Research at Nottingham University Business School (BPE is a founding sponsor of the Centre along with professional services firm Deloitte). It is one of the more pessimistic research notes to originate from within the industry in recent years – at least if you happen to be a large buyout specialist (which BPE, a successful pan-European mid-market house, is not).  

Titled “Shareholder demands sink buy-out deals” and featuring a dramatic photograph of a broken, sinking freighter, the note examines the rising trend of institutional shareholders resisting private equity-sponsored take-private proposals for large UK corporations.

The report cites private equity’s recent efforts to acquire assets such as Associated British Ports, HMV, ITV, Kesa Electricals and Great Universal Stores (GUS) and highlights the common thread that links them – the fact that large public market investors shot these bids down on the grounds that they undervalued the target companies. “With the huge [private equity] funds that have been raised, there is a lot of money in the market looking for a home and public companies have clearly decided they should be demanding a much larger premium,” writes BPE.

As a result, says the report, the UK buyout market has so far not seen much PTP activity this year. Just four take-privates worth a combined £485 million (€707 million; $906 million) were closed in the first quarter. And notably, the largest of these, the £404 million purchase of the Peacock Group, was entirely financed by hedge funds and didn’t absorb any private equity money whatsoever. Compared to the whole of 2005, the second most active year for UK take-privates on record with a tally of £7.2 billion of done deals, Q1 ’06 really wasn’t an encouraging quarter at all.

It would of course only take a big syndicated deal or two to get the UK market back on track: something akin to this week’s news in the US that a group of sponsors were on track to privatise pipeline group Kinder Morgan for $22 billion would comfortably take care of the problem. Interestingly, rumour has it that KKR is now hoping to pull off what Apax, Blackstone and Goldman Sachs failed to do in February and buy ITV, the broadcast group that is valued at around £5 billion. That deal alone would boost the UK PTP tally very nicely.

Provided, that is, Britain’s answer to Kinder Morgan would, from a private equity point of view, come at a satisfactory valuation. It remains a truism that everything is for sale at the right price, although that is precisely where BPE sees cause for concern: not only are public market investors asking private equity firms to pay up (which so far they have been refusing to do), there is also the additional problem that “the corporate market is taking inspiration from the success of the dynamic private equity players in 2005. Influenced by the private equity model, PLC boards are developing clear strategic plans for growth as well as working bank debt harder for special buy back plans.”

UK corporates, in other words, are learning to beat private equity firms at their own game. For those currently raising mega-funds, this raises some tricky questions. It looks as though big private equity’s value creation strategies may be in need of an overhaul. Judging from recent developments, the challenge from the public market appears to be a serious one. But don’t expect the LBO giants to capitulate anytime soon – there’s another truism worth recalling: a rising tide floats all boats. Prices may be firming but deals will still get done.