Take-privates are back on the menu

Public-to-private deals reached their highest level since before the global financial crisis last year as private market valuations prompted buyers to seek value elsewhere.

Private equity has renewed its appetite for public-to-private mega-deals.

Firms completed $227 billion of public-to-private deals last year, the highest level since a peak of $421 billion in 2006, according to Bain & Co’s Global Private Equity Report 2019. European take-privates reached $71.2 billion in 2018, compared with $44.5 billion the previous year.

The opportunity set is also growing: the number of US public companies with enterprise values between $2 billion to $10 billion and an EV/EBITDA multiple lower than the average private market multiple – even with a 20 percent take-private premium – climbed to 183 last year, exceeding the previous high of 151 in 2008.

Apollo Global Management is among those focusing on take-privates as it searches for value-oriented investment opportunities in a competitive market. The New York-headquartered firm finalised the take-private of Aspen Insurance for a reported $2.6 billion earlier this year and has completed at least eight such deals over the past three years.

“There’s a lot of companies that have been left behind and a lot of industries that have been left behind,” co-founder Josh Harris said on a 31 October earnings call. “If you have a complicated story, you’re not really welcomed so much in the public market. That is creating a very fertile hunting ground for private equity and we do see more opportunities there.”

The UK is one market benefiting from this trend: of the 42 firm offers for UK public companies announced in 2018, 13 were made by private equity, according to Jefferies’ Q1 UK M&A Market Review. Notable deals included Silver Lake’s £2.2 billion ($2.9 billion; €2.6 billion) takeover of ZPG, Bain’s £1.2 billion deal for esure and Advent’s £1 billion Laird purchase.

Demand for UK take-privates could be an unintended consequence of the MiFID II legislation introduced at the start of 2018, the Jefferies report noted. The legislation, which altered how banks and brokers charge for equity research, could result in mispricing opportunities on the lower-end of the public spectrum as firms cut their research budgets, it added.

Public-to-privates can be complex to execute. The public company governance model requires sale processes to maximise shareholder value while minimising potential shareholder liability, David Chung, an executive director at US mid-market HGGC, wrote in October. Firms accustomed to negotiating with a single owner or concentrated group of owners who can move without external scrutiny must adjust their expectations.

Fewer deal structuring options and limited ability to negotiate purchase agreement terms, which are important tools to manage risk for buyers, are also endemic to take-private deals, Chung said. Navigating various technical requirements of public company processes may present additional obstacles.