Talking Deal Prices: GPs find value in beaten-down public companies

Super-strong equity prices, aggressive strategics and cautious GPs have added up to a meager crop of take-privates by private equity firms nowadays.

But as resourceful GPs find their comfort zones on prices here and there, take-privates remain on the scene. They may even be gaining a bit of traction in deals ranging from just a few million up to about $5 billion.

While nearly absent in some quarters during the boom years of 2015-2017, several take-private deals emerged among the usual crop of stand-alone buyouts and carve-outs in 2016’s fourth quarter.

Take Talen Energy, a $4.3 billion take-private acquisition by Riverstone Holdings and one of the largest M&A deals of late. In the merchant power business, Talen Energy sells electricity on the open market instead of having its rates set by the review process that public utilities face.

Created about three years ago, Talen Energy was born by combining some of Riverstone’s competitive generation businesses with a spinoff of similar units from power giant PPL. As a public company, Talen Energy was owned about 65 percent by PPL and 35 percent by Riverstone.

Back when Talen Energy launched, the stock traded well up into the $20 range. But a sharp drop in energy prices and oversupply in merchant power hurt the business. By 2016, the shares fell below $10.

In June, Riverstone said it would take Talen Energy private for $14 a share, a healthy premium to the stock’s trading level at the time. Public shareholders got on board with the deal.

After annualizing Talen Energy’s most recent reported adjusted EBITDA of $247 million for the three months ended Sept. 30, Riverstone paid about 4.2x for Talen Energy. That’s a pretty low multiple.

To be sure, the merchant power game isn’t lighting up investors’ eyes right now. But it’s cyclical and is bound to come back at some point. With some U.S. nuclear power plants gradually decommissioning, the unregulated electricity-generation business may pick up the slack.

On top of that, Riverstone was already a minority owner in the company, so the firm probably knows Talen Energy better than nearly any other player out there.

The deal shows how many take-privates work for GPs who are willing to wade into a company when they see an angle others miss. That’s a mantra at many PE firms that manage to buy things at cheap multiples.

Apollo pays under 6x for Rackspace

In this vein, Apollo Global Management paid about 5.9x for Rackspace, annualizing the tech company’s most recent quarterly adjusted EBITDA of $175.9 million for the three months ended Sept. 30.

Considering that most platform companies typically command purchase-price multiples in the double-digit range, that’s low. Yet it was still rich enough to appeal to the company’s public stockholders, who got about $32 a share, more than double the stock’s 52-week low of $15.05.

In one other example, Golden Gate Capital paid about 3.5x Neustar’s annualized net cash provided by operating activities in a $2.9 billion deal to take the information-services company private. (The company doesn’t disclose EBITDA.) Neustar sold at about $33 a share after grinding along in the high $20s for the prior two years.

Of course, exceptions remain on the scene. Vista Equity Partners paid $1.45 billion to take Cvent private for $36 a share, or a hefty 69 percent above the stock price prior to the deal announcement in April.

The event-management cloud-services provider disclosed no EBITDA figures in its last quarterly financial filing, but the company was on track to post about $226.8 million in annual revenue. So Vista’s purchase-price multiple comes in at about 6.4x revenue.

That seems high. But Vista quickly moved to merge Cvent with Lanyon Solutions to create a “global meeting, event and travel technology leader,” as the firm said in November. So the combined company, now operating under the Cvent brand, may be worth more than the sum of its parts, especially if it continues to deliver growth.

It’s all about finding beaten-down names in the public equities market and spotting value. Even as Wall Street bids up its stock-market darlings to ridiculous heights, investors continue to shun out-of-favor companies. The cruel fate may not always be deserved for some of these public issues, which may beckon to wily GPs.

Marc Rowan, co-founder and senior managing director at Apollo Global Management, takes part in a panel discussion in the 2014 Milken Institute Global Conference in Beverly Hills, California, on April 29, 2014. Photo courtesy Reuters/Kevork Djansezian