Knockout bid

What's the right price for a company? Any investment banking analyst or business school graduate could deliver a lengthy discourse on any number of valuation models and the key drivers of company value. However, the fact remains that, like beauty, value is very much in the eye of the beholder. In short, a business is worth what the next guy is willing to pay for it.

Private equity principals have always taken pride in their ability to spot value ? or at least, as cynics would say, a good opportunity to arbitrage the difference between public and private markets. However, in today's ever more competitive environment, there are fewer such opportunities around. Moreover, investors and market observers sometimes question whether general partners really are that great at buying assets at the right price.

Take for example the recent acquisition from Telecom Italia of Italian yellow pages business Seat Pagine Gialle by a consortium consisting of BC Partners, CVC Capital Partners, Permira and local house Investitori Associati. The deal is Europe's largest buyout ever: Seat sold for €5.65bn, or 10.1x 2002 EBITDA. With the debt package alone likely to weigh in at around 7x EBITDA, isn't this too rich a price?

The answer isn't straightforward though. Says one of the losing bidders in the Seat auction: ?Would I want to own the asset at this price? No! But then I gave up long ago trying to figure out whether other people's deals were good or bad.? Coming from a practitioner with considerable experience in the LBO market, this statement is respectful of the idea, widely accepted in private equity, that success or failure of a transaction can only be fully judged after an exit has been achieved. Overpaying at the outset can be an enormous liability, but as any general partner knows, if the exit comes early enough, or at the right price, then everything else matters little. Nevertheless, the Seat transaction seems unusual by any measure.

In the final round of bidding, according to a participant in the auction process, Hicks, Muse, Tate & Furst and Apax Partners submitted an offer valuing the business at €4.725bn; a syndicate led by Kohlberg Kravis Roberts offered €4.95bn; and a syndicate headed by The Carlyle Group €5.05bn. The seller was widely reported to have been looking for around €5.5bn. So not only did the winning bidders exceed even the vendor's expectations on price, they also outbid the nearest loser by over 10 per cent. Given the size of the transaction, this meant €600m, or more than a full point of the company's 2002 EBITDA of around €560m. This seems extraordinary.

How does the winning price compare to what buyers paid in other deals in the directories sector? To be sure, there are some precedents for yellow pages companies changing hands at double digit EBITDA multiples. For example, the acquisition of McCleodUSA Publishing by Yell, itself owned by Hicks, Muse and Apax, in early 2002 was reported to have been done at around 10.3x, and the purchase of Telenor Media by Texas Pacific Group a few months earlier was said to be around 10x.

However, looking at published deal data, buyouts of directories assets on average tend to fall into the 8-9x EBITDA range. Witness the recent transactions involving British Telecom's Yell (8.6x); Telemedia from KPN (8x); the directories sold by Sprint (over 8x); and the buyout of Bell Canada's directories assets (9.25x). And the mammoth $7bn acquisition by The Carlyle Group and Welsh Carson Anderson & Stowe of Qwest's directory business, QwestDex, was equivalent to slightly more than 7x EBITDA, albeit for a business operating in a market with significant competitive threats and whose revenues were declining.

So compared to the sector's standard, the price paid for Seat looks full. Indeed, there are those that feel that the headline figures actually understate the true acquisition multiple of the deal. The Seat business consists of a number of separate divisions ranging from Gruppo Buffetti, a stationary supplier, to internet service provider tin. it and British local directory business Thomson. If one values some of the less profitable assets such as Thomson at a more conservative multiple of 7-8x EBITDA and considers the core Italian businesses separately, then their effective multiple approaches an eyewatering 11x. This comes out comfortably ahead of any comparable transaction the sector has seen.

So why did the winning consortium come up with such a big number? Clearly, it felt a knock-out bid was in order for a business that occupied a dominant position in an unregulated market and generates stable and impressive margins with very low investment requirements. Seat is a formidable cash-generating machine. But at this price, given that the company is so profitable already, it seems fair to ask what value its new owners can realistically add to it, and how much more any subsequent owner would be prepared to pay? Answers on a postcard, please.