Friend or foe?

CVC’s latest fund can go hostile, but will more likely be used to apply pressure to a recalcitrant board.

The green-light from investors in CVC Capital Partners’ latest fund for the firm to go hostile in takeovers gives the firm another tactic to deploy against boards reluctant to submit to a buyout offer.

As one banker says: “What is a hostile bid? Has Permira gone hostile in its approach to Britvic? It claims not. It is a friendly and unsolicited approach. Is it a tactic to bring the board back to the table? Almost certainly.”

Permira built a 14% stake in the UK soft drinks group last month. The buyout firm said in October that it was not about to launch a takeover approach for the company. Press speculation had suggested otherwise.

The stake-building Permira claims still adheres to its original position, that it would not make an offer within six months unless it had the agreement or recommendation of the board of Britvic or if a third party made an approach or an offer for Britvic, or in the event of a reverse takeover.

In other words: Permira is far from master of its own fate.

The banker says CVC’s permission from its investors allows the firm to take a step further in the game of chicken that can play out in a public-to-private negotiation.

“Without the sanction of a hostile approach, private equity firms can be hung out to dry when really they need to be moving in with all guns blazing, as a couple of the big buyout firms have found to their cost,” he says.

Going hostile can take the decision out of the board’s hands and put it back where it should always have been: in the hands of the company’s shareholders. The banker says: “When you look at HMV, whose share price has been in free fall since it rejected a bid from Permira, you have to ask for whose benefit was the bid spurned? Has it saved value for shareholders? No. Has it saved the board’s jobs? For the time being, yes.”

However, CVC’s dispensation from its shareholders is unlikely to usher in a new age of hostility in public to private deals.

As one fund of funds manager observes: “The huge benefit private equity has when it buys a private company is due diligence. It has often been crawling all over the company for months. When it buys a public company, that intelligence gathering is compromised and restricted to what is in the public domain. Its hands are tied. When it goes hostile, it is wearing a blindfold as well.”

He says the change in CVC’s circumstance will likely allow the firm more effectively to pursue a “bear hug” of the kind that delivered British Vita, a UK chemicals business, to Texas Pacific Group. In that deal Texas Pacific talked directly to shareholder and through them compelled management, which was against a buyout, to open its books.