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Big LBO Shops Bide Time with Small Deals

(Reuters) – Big private equity firms are scrapping over bite-sized deals as they wait for financing markets that seized up over the summer to reopen for billion-euro-plus prospects across Europe.

After a strong first half in which large buyouts returned at companies such as Swedish cable group Com Hem and French engineering firm Spie, turbulence in debt markets, brought on by a crisis of confidence in the euro zone, led to a dramatic drop in new deals in the third quarter.

European private equity deals fell 41 percent in the quarter and registered another month-on-month fall in October to just $2.6 billion, according to Thomson Reuters data.

A host of widely-trailed auctions, expected to dominate the autumn months, have been put on ice or pulled mid-process, leaving private equity professionals and bankers expecting few large deals to get agreed this year — particularly with Greece’s bailout referendum not likely until early 2012.

While they wait for those large deals to come back, some big buyout firms are hunting in the mid market, where they can still scrape together debt packages at reasonable rates from a club of banks.

“Buyout firms are going a bit smaller just to get things done,” a banker who advises private equity firms said, while a second banker said: “More people have realized that they cannot do the big deals and have started to gravitate downwards.”

Among businesses attracting their attention is oil and gas logistics group Asco, which has drawn bids from Advent International and Cinven and is seen selling for up to 300 million pounds ($484.2 million), people familiar with the situation said.

The price tag puts a potential deal at the bottom end of the usual investment range of firms like Advent and Cinven and pits them against traditional mid-market investors including Montagu and Doughty Hanson, the people added.

Similarly Garden Center Group, in the hands of Lloyds Banking Group since 2009, has pulled in bids from Apax, Terra Firma and former JP Morgan buyout arm CCMP.

People familiar with that deal said the company could fetch between 250 million pounds and 275 million.

Bankers reckon private equity firms could stretch to buying companies worth 750 million euros, given current market conditions. But that would entail tapping into pricey mezzanine markets, which would push up costs and force target returns below the level many are willing to accept.

High prices and fierce competition for deals earlier in the year tempted corporates and private equity firms to prepare companies for sale after the summer. Many of those deals are now on ice, waiting for bridging loans on earlier deals to be refinanced and investor appetite for debt to return.

Some launched early and unraveled mid-process, like retail group PPR’s sale of its catalogues business Redcats. Others like Charterhouse’s anticipated sale of workplace services group PHS was paused after the exploratory phase, people familiar with that process said.

A small number of planned disposals — such as France Telecom’s mobile group Orange Switzerland, a portfolio of GlaxoSmithKline’s OTC pharmaceutical products, as well as Iceland Foods — hang in the balance.

One sign of encouragement that debt appetite is returning is the launch of a 3.5 billion Swedish crown ($550 million) high-yield bond on Com Hem, the Swedish cable company BC Partners agreed to buy in July.

Much depends on confidence returning that Europe’s sovereign debt crisis will be resolved. But if it does, and debt markets unclog, sellers have done a lot of preparatory work and will be able to launch — or relaunch — auction processes quickly.

“If there is a window, who knows how long it will stay open,” another banker said. “But you would kick yourself if you missed it.”

($1 = 6.355 Swedish crowns) ($1 = 0.620 British Pounds)

(By Simon Meads; editing by David Holmes)