It's potentially a match made in heaven: company with desperate need for capital meets private equity firm with abundant dry powder and desperate for the chance to put it to work. Welcome to the new era of the PIPE deal (private investment in public equity)?
Two recent reported developments relating to listed UK companies suggest this may indeed be the case. Premier Foods, owner of food brands including Hovis bread and Mr Kipling cakes, was reported in London's Times newspaper to have spoken to its lenders about sanctioning a simultaneous £300 million (€332 million; $435million) rights issue and sale of a 40 percent stake in exchange for the relaxation of covenants on its £1.8 billion debt mountain.
Among the parties believed to be interested in the firm's share placing, according to the report, were private equity firms Blackstone Group, Lion Capital, Bain Capital and Permira.
This news was swiftly followed by media reports that building materials group Wolseley was talking to private equity firms and other investors about a rescue fundraising of between £200 million and £400 million. The firm has debts of around £2.7 billion and has taken cost-cutting measures following a 50 percent drop in its most recent quarterly profits.
The Sunday Times reported that Wolseley was “one of dozens of [UK] listed groups that are preparing to raise hundreds of millions of pounds in the coming weeks to reduce ballooning corporate borrowings”.
For buyout groups unable to access much leverage and therefore forced to consider unorthodox options, increasing opportunities to invest in listed companies would appear to be a welcome development – especially if stock market shares are at or near the bottom, as a growing number of pundits are predicting.
However, PIPE deals have drawbacks including a lack of control rights and limited partner scepticism about private equity firms investing in public stocks. Furthermore, PIPE deals have a sketchy track record dating back to the early part of the decade when a number of private equity-backed listed telecom companies tanked.
PIPE deals in Europe have been far less common than in the US.The most high-profile example in recent years was Blackstone Group's acquisition of a 4.5 percent stake in German phone giant Deutsche Telekomin April 2006 for €2.7 billion. Any similar-sized deal today would be a bold bet. Watch this space.