Public-to-private deals could come out of their pandemic-induced lull and increase over the next 12 to 24 months, say industry practitioners
Prior to the onset of the covid-19 crisis, an increasing number of takeovers of listed companies had occurred in the market – 31 in 2019 which is almost double the yearly average according to data from Mergermarket. Anecdotally, PE practitioners told Private Equity International that they have been involved in a “substantially large volume of P2Ps” this year than previous years, despite a tougher market environment.
In fact, more private capital will be used for public companies that face financing issues as a result of the coronavirus pandemic, Jorge Quemada, a partner at Cinven said at an industry event in October. “I do see many more transactions, public-to-private [deals] or PE firms taking a large investment in a public company or doing a joint venture with subsidiaries of a public company.”
Here are four features of how P2Ps could play out over the next year.
More PE firms and strategic buyers team up on deals
KKR, Cinven and Providence Equity Partners’ tie-up for the €5 billion take-private of Spanish telco operator MasMovil captured headlines this year as the biggest P2P in the region, and more of such partnerships can be expected in the year ahead.
Deal complexity is a big driver. “If you own a majority stake in a publicly listed company and you have a longer-term view on value, teaming up with private equity to take a company private and recapitalising it with a partner that’s got the expertise to help you do that make these consortium bids interesting,” said Robert Ogilvy Watson, a partner at Macfarlanes. Teaming up with a trade buyer as a consortium also means potentially taking an effective counter bidder out of the equation, he added.
It’s also a function of the size of the market in Europe, in which funds are not as big as the US, according to Yawar Murad, a managing director with Alvarez & Marsal’s private equity performance improvement practice in London. He adds that such transactions are less frequent and so when they arise, firms are more likely to team up to bid on deals.
“We are also seeing firms and corporates team up on smaller transactions but bigger than they are used to doing,” Murad said.
Other tie-ups so far this year include Ahlstrom Capital, Bain Capital and Viknum and Belgrano Inversiones’ tender offer for Finnish fibre-based products supplier Ahlstrom-Munksjo in a deal valuing the company at €2.1 billion, as well as Warburg Pincus and TowerBrook Capital Partners’ reported £219 million ($292 million; €244 million) rescue bid for UK roadside recovery company AA.
Bidders vastly prefer a scheme of arrangement than a takeover offer
A scheme of arrangement is proving to be the most popular method to implement a deal than a contracted takeover offer, according to the legal experts.
From a GP’s perspective, the arrangement is “extremely attractive” because of its flexibility, said Richard Burrows, a partner at Macfarlanes.
“When you get your shareholder vote, which is 75 percent of those voting, and the scheme has been sanctioned by the court, then the bidder gets 100 percent control of the company and you are done. This is also attractive for debt finance providers, who are able to put in place a security package as soon as the scheme is sanctioned.”
What this means is when a GP has obtained its 75 percent vote and the scheme has been sanctioned by the court, it owns 100 percent of the company and all the minority shareholders are brought along, said Burrows. “That has ultimately proven to be the most attractive feature of a scheme.”
Politics will be a factor in large deals
For most European countries, the covid-19 pandemic has highlighted the need to restrain foreign investment especially in sectors deemed crucial for national security reasons.
Although there hasn’t been much noise this year compared to a year earlier with regard to government intervention on foreign takeovers, GPs shouldn’t lose sight of politics playing an ever-increasing role in deal certainty, especially for large deals, the legal experts noted.
“If there are household-name businesses that serve some essential function in the country and are seen to be strategic, you might see some select committee inquiry or people trying to manufacture national security concerns to try and block transactions,” said Ogilvy Watson.
Politics is still a factor on the large deals, he added.
More deals in traditional industries and in smaller listed markets
The pandemic and the resulting need for ownership transition in public companies is a factor that could drive the rise of P2Ps in the months ahead.
Covid-19 has had a double impact on some publicly listed companies: a depressed share price makes them a more attractive acquisition and businesses hit hardest need additional capital to prop up their balance sheets.
Small or mid-cap businesses off the main index can also hold exciting potential for PE firms, according to Eric Rouzier, partner and head of Europe healthcare at Clayton, Dubilier & Rice.
“Fast-growing platforms that listed and got to a certain size – the €50 million-$100 million profit zone – means we can partner with them and accelerate growth over three to five years by investing in people and systems,” Rouzier said. CD&R completed its acquisition in May of pharma commercialisation and communications group Huntsworth in a deal valued at £575 million.
“It has to be in the interest of all stakeholders – that’s probably why you see more take-privates now. It’s not so much that there is more activity, it’s more that they actually get done,” said Rouzier.