Secondary buyouts continue to rise

Latest research reveals that more secondary buyout transactions are taking place in Europe as funds seek to match both exit and entry objectives.

Initiative Europe, the European private equity research firm, has published research showing that there have been the most secondary buyouts in Europe in 2002 ever. The preliminary results indicate that secondary buyouts have risen to a record 19 per cent of all UK buyout deals and to 14 per cent of all European buyouts.

The findings concur with the Centre for Management Buyout Research’s (CMBOR) annual review also published this week. The survey revealed that the number of secondary buyouts closed so far this year more than doubled compared to the previous year, accounting for 10.8 per cent of 216 exits against 4.9 per cent of 243 exits achieved in 2001.

Notable secondary transactions include Duke Street Capital’s £100m acquisition of health and fitness operator Invicta Leisure from Electra Partners and BC Partners’ sale of French textile cleaning business, Elis, to BNP Paribas for E1bn.

“Trade sales have fallen further in 2002 as embattled corporations have concentrated on core businesses and have kept further away from acquisitions, contributing to the rise in secondary buyouts across Europe as private equity firms seek to realise their investments,” said Dorothy Engmann, editor of Europe Buyout Review, annual buyout statistics published by Initiative Europe.

However, some private equity players remain sceptical about the returns a secondary buyout can deliver. John Snook, head of Close Brothers Private Equity said: “There is no question that the best route for a business is via a trade sale. You don’t get ten times the EBITDA value on an exit from a financial buyer because we just don’t pay those prices and not many do. That’s the problem with the secondary buyout.”

The bad news for the buyout industry is that the total value of buyouts across Europe continued their downward trend, dropping to E37.6bn in the first 11 months of this year, compared with E59.9bn in 2001. Initiative Europe attributed the overall decline in buyout value to a reduction in transactions at the top end of the market. There have been fewer multi-billion Euro transactions, although the recently concluded sale of Legrand to KKR and Wendel Investissement is a striking instance of a mega-deal.

The total number of European buyouts meanwhile, fell by 28 per cent to just under 250 transactions, compared with 340 buyouts in the same period in 2001. Average deal sizes were also down, at E154m, with just two E3bn buyouts completed in contrast to four in 2001.

Commenting on future prospects of buyout market going forward, Snook said: “Corporate financiers are saying that their volumes are picking up and they are often the first to hear of an upturn in the market. There is also a feeling that M&A will pick up because corporates will eventually give up on prices, as demonstrated by the recent sale of by Compass of its Travelodge chain of budget hotels to Permira for £712m.”