The prospect of a slew of take-private deals is a popular theme among investment bankers. Whether or not it is driven by wishful thinking on the part of the banker hoping to drum up M&A activity, the logic behind it normally holds water. Since the beginning of the global financial crisis, various sets of circumstances – starting with heavily discounted share prices – have conspired to make these deals an attractive prospect.
First off there was the panic of the early crisis days. Institutional investors saw value destroyed across their portfolios and institutional fund managers – facing accelerating redemptions from clients – looked like they would need to liquidate positions quickly. Perhaps they would be amenable to a sensible offer at a premium to their stocks’ depleted share price? The heroic private equity bidder, armed with ample dry powder, would be able to provide the solution.
Then came the realisation that listed corporates would need to raise capital to refinance. With the debt markets seized up, PLCs needed to rely on equity capital markets but there was a feeling that the supply of fresh shareholder capital would not be sufficient to meet a rush of rights issues. “It […] became clear to us that when the debt markets dried up people would have to go elsewhere: the capital markets,” as Lynn Fordham, chief executive officer of SVG Capital said in October’s PEI.
Sure enough, there have been some notable take-privates since the crisis took hold. Most recently Cinven has moved a step closer to acquiring Spice, a London-listed utilities services company, for £251 million (€295 million; $398 million). In early October, Hellman & Friedman agreed a $640 million take-private for Internet Brands, a NASDQ-listed online media company.
But as it turns out, the proportion of buyouts in Europe accounted for by take-private deals has changed very little during the years of the financial crisis. In 2006, public-to-privates accounted for 2.9 percent of European buyouts in terms of number of deals, according to the Centre of Management Buyout Research at Nottingham University. In the three-and-a-half years of data since, this figure has not moved more than 0.5 percent either way.
This may be because public-to-private deals are harder and more expensive to execute. “The process requires the bidder to come up with a workable plan that complies with a large array of procedural and substantive rules,” says Selina Sagayam, a London-based M&A lawyer with Gibson Dunn. “Private equity professionals tend to want to do things in their own blue sky way, which doesn’t fit well with public company acquisitions.”
Or it may be because the various market forces as discussed above were less extreme than expected. Either way, the public markets have remained a marginal hunting ground for private equity firms.
Will a new set of circumstances change all this? With funds ticking towards the end of their investment periods after what has been a relatively barren two years, private equity capital is more willing (let’s not say desperate) than ever to find opportunities. In secondary buyout deals, these willing buyers are finding equally willing sellers, but only the highest quality assets are finding their way onto the block and are often the subject of fiercely competitive – and hence expensive – auctions.
Meanwhile, public stock markets have rebounded. With share prices looking less “bargain basement”, institutions may well be happier to entertain offers. If the same institutions fear a “double-dip” recession threatens the share price in the short term, they may be even happier to cash out.
“A private equity owner can take a longer term view and may be able to say that this is a business that will be performing better in three to four years time,” says Gareth Taylor of Investec, which is advising Cinven on its acquisition of Spice. Taylor points to property services and more general support services businesses – a category into which Spice fits – as being likely targets for private ownership.
It won’t be a dramatic rush, however. “You’re not going to suddenly see 50 take-privates,” says Taylor. But the Spice deal and several other current processes suggest a surge may be on the horizon.