This year has seen a record surge in take-privates as firms find ways of investing their unspent capital
Private equity firms are seeking out ambitious public-to-private deals on the European stock market at the fastest pace since before the financial crisis.
Seeking an outlet for their glut of uninvested capital, buyout firms have already agreed take-private transactions worth more than $27bn so far in 2018, according to Dealogic — the largest sum since 2007. With nearly a quarter of the year still to go, deal value has already far surpassed the previous post-crisis high of $20bn set last year.
At a time of intense competition for large, desirable assets, the stock market presents a wealth of opportunity for firms capable of pulling off potentially tricky take-private transactions.
“Public-to-privates are increasingly high on the agenda for PE funds, partly driven by the ever-growing amounts of capital requiring deployment,” said Riccardo Villa, a London-based director responsible for private equity at investment bank Lazard.
So far this year there have been five European take-privates worth more than $1bn, according to Dealogic. Among them were Silver Lake’s £2.2bn purchase of ZPG, the owner of property-search portal Zoopla, and Advent International’s $1.6bn purchase of British electronics business Laird.
Turning to the public markets is one way of avoiding the fiercely competitive auctions that helped push the earnings multiples paid in private equity deals to record highs last year.
“Private equity cannot rely on the fact that they are going to win an auction. If you are going to win it, potentially you will win it at a price that will put pressure on your returns,” Kiran Sharma, a private equity partner at law firm Ropes & Gray, said.
“As a result, private equity firms have to diversify and become more creative,” she said. “Private equity needs to take on situations that are more complex than your classic secondary or tertiary buyout. We have seen many funds coming back to the take-private market over the last couple of years as part of that.”
Buyout firms prowling the stock market this year have been helped by the muted performance of European equities, which have slipped amid concern over international trade disputes and political uncertainty in Italy. The Stoxx 600 index of European companies is trading at about 13.8 times earnings, down from above 15 times at the start of the year, according to FactSet.
Nevertheless, public-to-private deals hardly represent a cheap option. Several attempted take-privates have run aground this year because the offers weren’t high enough. Villa at Lazard said shareholders are getting wise to opportunistic bids from private equity firms.
“Boards are showing increased discipline in considering, and often rejecting, overly opportunistic bids,” he said.
This month, Belgian diaper maker Ontex Group rejected a takeover bid from French private equity firm PAI Partners. Other unsuccessful attempts to take companies private include Apax Partners’ £1.6bn offer for BCA Marketplace, the owner of car-buying website WeBuyAnyCar.com, which rejected the offer in June on the grounds it undervalued the company.
To make sure their bids are successful, firms have been offering larger premiums for public companies to win the approval of their shareholders, the Dealogic data shows. Across the 10 largest deals so far this year, firms paid an average premium of 31% over the target company’s share price the day before the bid.
That was the highest average figure for the top-10 deals of any year in Dealogic’s data going back to at least 2006, and compares with 20.5% last year.
“Takeover premia are toppy,” Villa said.
Even if the price is right, take-private deals present a gauntlet of challenges for bidders, said Sharma at Ropes & Gray.
“Private equity firms always need to do their full suite of diligence,” Sharma said.
“Depending on deal size, they will also need to arrange financing. If there is a leak, the takeover panel gives them 28 days to complete all their diligence and put a financing package in place,” she added, referring to the UK’s regulatory setup.
“There is a lot of deal risk and they can burn a lot of cash,” she said.
Going public with a bid can also expose private equity firms to an unfamiliar level of scrutiny from the media and politicians. Melrose Industries’s purchase of UK engineering company GKN is one example.
Melrose, which was jostling with US private equity firm Carlyle Group to buy GKN, became front-page news for a spell when British politicians aired concerns about potential job cuts and the security of the company’s pension pot.
On the other hand, firms pursuing take-private deals often find willing allies among the target companies’ management, said Villa.
A public listing brings increased regulatory and reporting scrutiny for companies and means management teams have less time to focus on driving growth in their business, he said.
“Management teams are often supportive of returning under private ownership for the added flexibility compared to the public markets to pursue M&A ambitions or corporate transformation — with the firepower of PE backers,” Villa said.
Three of Europe’s biggest take-private offers in 2018
Company: ZPG
Firm: Silver Lake
Size: £2.2bn
Successful: Yes
US private equity firm Silver Lake agreed a deal in May to take ZPG, one of the U.K.’s biggest internet property search companies, private for £2.2bn. Silver Lake agreed to pay 490 pence a share in cash for each ZPG share, a hefty 31% premium to the search company’s closing price Thursday and 24% premium to ZPG’s all-time closing high in March 2017.
Company: Esure Group
Firm: Bain Capital
Size: £1.21bn
Successful: Yes
Private equity giant Bain Capital announced a deal to take insurance company Esure Group private last month. The firm, which manages $95m in assets, had its £1.21bn bid accepted by the company’s board. The bid represented a 37% premium to Esure’s share price.
Company: BCA Marketplace
Firm: Apax Partners
Size: £1.6bn
Successful: No
In June, BCA Marketplace, the owner of car-buying website WeBuyAnyCar.com, rejected London-based private equity firm Apax Partners’ £1.6bn takeover offer on the grounds that the offer undervalued the company. Apax decided a month later to drop its pursuit of the company.
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