Gearing up for rejection

Private equity firms are having trouble spending the record sums being raised, especially when it comes to European public-to-privates. Robert Venes reports.

Despite the recent trend in private equity of mega-funds and ‘club’ deals, where large US and pan-European buyout houses partner up to buy ever larger assets, a number of recent snubs for take-private bids in Europe have subdued the buyout market so far in 2006.

Tom Lamb, co-head, Barclays Private Equity  

According to research released last week by Barclays Private Equity and Deloitte, this year has got off to a slow start with the value of take-privates in the UK totalling just £485 million (€691 million; $849 million) from four deals in the first three months. This compares to 20 transactions totalling £7.2 billion for the whole of 2005, a record figure according to Nottingham University’s Centre for Management Buyout Research, which compiled the data.
Last week, UK broadcaster ITV rejected a second bid from Apax Partners, The Blackstone Group and Goldman Sachs Capital Partners, apparently amid concerns that planned leverage of over 7x EBITDA would place too great a strain on the target company.
The same day, telephone and internet provider Kingston Communications said it had ended takeover talks with a mystery bidder, believed by market sources to be The Carlyle Group.
Other PTP offers have been rejected in a very public manner. This week, VNU minority shareholder Knight Vinke Asset Management (KVAM) announced that it would reject a €7.4 billion offer from Valcon Acquisition (AlpInvest, Blackstone, Carlyle, Hellman & Friedman, Kohlberg Kravis Roberts and Thomas H. Lee Partners), and encouraged other shareholders to do likewise.   
KVAM said that VNU “is capable of generating substantially higher profits from its existing core businesses” under its current structure and that the private equity offer undervalued the company by 25 percent to 40 percent.
Meanwhile, the Nordic Telephone Company (Apax, Blackstone, KKR, Permira and Providence Equity Partners) has seen its €10 billion offer for Danish telecom TDC result in pension fund ATP filing a complaint with the Danish Commerce and Companies Agency and undertaking legal action over the consortium’s attempt to squeeze out minority shareholders.
Retailer GUS and music and entertainment group HMV have also recently snubbed private equity bids as undervaluing their respective businesses.
Tom Lamb, co-head of Barclays Private Equity, says that, although a number of trade buyers have seen bids fail as well, private equity firms in particular have become victims of their own success. “Private equity has been pretty vocal in trumpeting its successes, saying that nothing is beyond their reach, including the public markets,” he says. “The problem with that is that nobody wants to be the corporate M&A equivalent of the man who turned down the Beatles.”
Lamb points to Debenhams, which was sold to CVC Capital Partners, Texas Pacific Group and Merrill Lynch Private Equity in a £1.9 billion buyout in May 2004. “There is the embarrassment factor of recommending selling the company and then two years later finding out it was you that got mugged as the new owners have doubled profits, got their money back and are now looking at a flotation,” he adds.

None of which means public owners can’t be persuaded to sell, says Mark Pacitti, corporate finance partner at Deloitte. “That embarrassment factor can always be overcome if there is a cash bid on the table at a sufficiently attractive premium,” he says. “I don’t think you will get public company shareholders assigning a ‘not for sale at any price’ sign on their assets. The problem is that they expect a control premium of 20-30 percent over their current share price and private equity firms may ask why a firm is worth that compared to what it was valued at the day before.”
So what can private equity firms do in the current climate? One possibility is that, given inherent cyclicality, the current climate will change at some point. “We’ve been through a period where private equity has very much had the jacuzzi to itself and can do what it wants, with the largest M&A activity since 1999 – but that cycle may well change and shareholders become more receptive,” says Lamb.
Both Lamb and Pacitti agree, however, that for the time being private equity may simply have to accept public shareholder demands and pay more. With one or two funds currently in the market looking to raise north of $14 billion, lack of funding power shouldn’t be a problem.