The assurance of a direct sale compared to the uncertainty of selling a minority stake and braving the equity market can be hard to resist for sellers, particularly for buy-out houses whose overriding focus is maximizing returns.
It proved too tempting for American International Group (AIG), which this week agreed to sell its Asian unit AIA to British insurer Prudential for $35.5 billion rather than float it in Hong Kong..
Big IPOs scrapped in favor of a sale in recent months include German cable firm Unitymedia, UK retailer Pets at Home and Nordic private healthcare firm Ambea.
Charlie Bott, managing partner at BC Partners, said that private equity generally favored full disposals to partial stake flotations.
“If you have a price range for an IPO of 7 to 10, for a private equity person to be able to sell 100 percent at 8.5 is generally speaking much more attractive than being able to sell 25 percent at 9, unless you really believe that in the public ownership the business will thrive,” he said at this week’s Reuters Private Equity and Hedge Fund summit in London..
Taking the company public through an initial public offering (IPO) typically involves selling a quarter or a third of the company and selling the rest over the next two years. “The risk with an IPO is the market can be shut when you want to do the deal or the valuations might be unsatisfactory,” said a debt banker at a European investment bank.
Under a “dual track” process, a seller pursues an initial public offering and a sale at the same time. It can choose the option that offers best value, often at the last minute.
The process worked well for AIG and will return some cash to the U.S. taxpayer more than a year after a $182 billion bailout — but it shouldn’t have come as a surprise.
AIG flagged in December it was pursuing a dual track process for AIA when it slashed its debt in a debt-for-equity agreement with the New York Federal Reserve.
“At an investment bank you wouldn’t be giving the right advice if together with an IPO option you didn’t present it against the M&A option,” said Bott, formerly a Goldman Sachs investment banker.
While sellers often do not launch a formal dual track process, that doesn’t mean the process isn’t in place.
A successful dual track creates competitive tension between the two sides, with potential buyers knowing there is an IPO price they need to match or trump and also reassured that the due diligence and disclosure on a company has been high.
But there are costs associated with the process. Investors and banks can be angered if they study or work on an IPO and it is whipped away, and it can be time-consuming for management.
“Running two processes right to the wire is very rare. You may start off keeping your options open, and benefit from the synergies of the process, but after a time it gets quite difficult to run,” said Louise Wolfson, a partner at law firm Allen & Overy’s ECM practice.
Dual tracks are not new — UK holidays-to-insurance firm Saga was a classic process in 2004, ending with a 1.4 billion pound sale just before it was due to list.
Nor are they a one-way trend: private equity owner Providence last month halted the sale of German cable TV operator Kabel Deutschland (KDG) to private equity firms, preferring instead a flotation.
KDG’s owners were confident that buyout firms were undervaluing the business and they will earn more over time as markets and investor sentiment recover. That confidence will be tested when the IPO prices this month.
Strategic trade buyers like Prudential hold the trump cards in M&A after being frequently outbid by financial buyers during a leveraged buyout boom that ended in 2007, bankers said.
In Europe there are 50 potential IPO candidates and the majority are private equity owned, the banker estimated.
“Strategic buyers have a clear cost advantage right now, whereas the shoe was on the other foot before the crunch, though perhaps only 10 percent of assets on offer suit them,” said a head of European financial sponsors group at an investment bank.
(Additional reporting by Daisy Ku, Editing by Sitaraman Shankar)