Private equity exits back on agenda

A rash of recent realisations from private equity-backed businesses suggests that exit routes are once more opening up after a fallow period.

Private equity exits are back on the agenda if recent experiences are an accurate guide. This follows a number of years when trade buyers were absent from auctions due to poor corporate growth and stock markets were largely closed to new issues.

Leading the way this week was the agreed sale of the Savoy luxury hotel group by Blackstone Group and Colony Capital to a syndicate of wealthy Irish investors led by Derek Quinlan. The deal, reported to be worth around £750 million (€1.1 billion; $1.4 billion), is expected to complete by 8 May 2004. Quinlan is reported to have beaten off competition from several high-profile hotel owners, including Prince al-Waleed Bin Talal.

Blackstone and Colony, both US private equity firms, acquired Savoy for £520 million in 1998 in a deal that included £365 million of debt. They subsequently spent £55 million renovating Claridge’s, the most valuable hotel in the group. The sale price achieved is being seen as highly favourable in the context of a hotel sector badly affected by a tourist slump following September 11, the Iraq war and Sars.

Meanwhile, 3i announced it was selling retail outlet Early Learning Centre (ELC) to entrepreneur Tim Waterstone for £62 million in a deal backed by publisher DC Thompson, private equity firm Rhone Capital and Bank of Scotland. Waterstone says he intends to merge ELC with his loss-making children’s clothing chain Daisy & Tom. 3i backed the £30 million management buyout of ELC from John Menzies in September 2001.

Last week, Montagu Private Equity demonstrated that the IPO market was alive and well when floating portfolio company Dignity Funeral Services, the funeral operator, for £184 million on the London Stock Exchange. A report in The Times said Montagu stood to make a profit of about £100 million from its original £50 million equity investment in the firm at the time of a management buyout from Service Corporation International (SCI) of the US in 2002.

Also last week, Barclays Private Equity sold Salter Housewares, which it backed in a management buyout in 2002, to US-based HoMedics. The sale realised an IRR of approximately 70 percent according to BPE’s Rob Myers, who led the investment. He said: “Inevitably there has been an increased level of interest from trade buyers as a result of equity markets stabilising. For the last 24 months they have been reluctant to put their heads above the parapet but firms are prepared to undertake deals now if they make real strategic sense.”

He added: “There is also still a strong appetite from private equity firms for secondary buyouts, which means there is significant scope for developing competitive tension in the sales process. Strategic buyers should be in a position to pay more for a business given the cost and cross-selling synergies available but private equity firms are forcing them to up the ante – delivering higher returns to vendors.”