The decision by Pacific Equity Partners to shelve flotation plans for cinema operator Hoyts underscores a recent study by global law firm Norton Rose, which suggests secondary transactions and trade sales will continue to be the most likely exit strategy pursued by Australian private equity firms this year.
PEP paid A$440 million to acquire Hoyts from Australia’s Publishing and Broadcasting and West Australian Newspapers in 2007. In March, the firm reportedly halted plans to float Hoyts, with PEP executive chairman David Kirk telling Reuters there was no timetable to sell, and that it “was not the optimal time to exit the business”.
If the flotation had gone ahead, it would have been the first private equity-backed IPO since those of TPG Capital-backed Myer Group and Quadrant and Goldman Sachs JBWere-backed Kathmandu in late 2009. The worse-than-expected performance of the two companies at flotation and the poor performance since was frequently cited as a deterrent by other private equity firms eyeing the public markets in 2010.
There’s a concern that since those two high profile floats [Myer Group and Kathmandu] didn’t do as well, it’s hard for someone else to come through.
Kathmandu, for instance, planned to raise as much as A$374.9 million from its IPO. The company intended to price its shares in the range A$1.65 to A$1.90 per share, but ended up pricing them at A$1.70, near the lower end of the indicative range. Myer Group, on the other hand, had marketed its IPO in the indicative price range of A$3.90 to A$4.90 per share. The company ultimately sold its shares at the lower end of the range as well, at just A$4.10 per share.
At the time of going to press Kathmandu was trading at A$1.64 per share and Myer Group at A$3.29.
The Norton Rose study, which used data provided by professional services firms such as KPMG, Mergermarket, AVCAL and PKF to determine its findings, said this market uncertainty continued to be a big deterrent to firms seeking to exit their existing portfolios via a public listing.
“There’s a concern that since those two high profile floats didn’t do as well, it’s hard for someone else to come through,” says Nick Humphrey, the Sydney-based head of Norton Rose’s Australian Private Equity Group.
According to Humphrey, the strong M&A market coupled with interest in Australian assets from foreign buyers makes direct sales between parties a more appealing method for exiting an investment compared to public listings.
“Of the billion-worth of exits we did last year, 90 percent of them were bought by foreign buyers,” Humphrey says. “I think foreign corporate are happy to pay good multiples for these Australian businesses, they think of Australia as being stable and having a good strong economy.”
Australian assets which caught the attention of foreign bidders last year included CHAMP’s Healthcare Australia, which in November received an undisclosed size offer from UK trade buyer Healthcare Locums to acquire all its holdings in the nursing, health and homecare provider; and Treasury Wine Estates, the wine business of beverage group Foster’s which received, and subsequently rejected a A$2.7 billion bid by US firm Cerberus Capital.
The Norton Rose study predicts GPs will maintain their focus on exits in the coming year. “I think there’s pressure on the Australian funds to prove their vintage; they didn’t exit through the global financial crisis so there’s a bit of a portfolio backlog for them to get out of,” he says.
It also notes that although the first half of 2010 was relatively uneventful in terms of private equity activity, the $2.3 billion leveraged buyout of Healthscope by The Carlyle Group and TPG Capital, coupled with Kohlberg Kravis Roberts’ $1.75 billion bid for Perpetual seemingly opened the floodgates in the second half of the year.
However, with the spike in deals also came higher than average valuations. Humphrey says not only have a couple of high value trade acquisitions skewed the multiples in the energy and materials sector, enthusiastic retail investors looking for places to park their money may also be driving prices up.
“There are a couple of sectors that are pretty hot at the moment, mining and energy resources and materials, so a lot of money is going into those sectors and I think that may be artificially inflating multiples,” he says.
All the more reason for firms to stay focused on exits.