Dealtalk: Buyout Firms Target Unloved Corporate Divisions

(Reuters) – Buyout firms are rolling up their sleeves, hopeful of getting their hands dirty with a growing number of takeover targets unloved by their corporate owners and never before touched by private equity.

A selection of GlaxoSmithKline’s non-prescription drugs, fashion group PPR’s catalogues and online retail division Redcats, and Oberthur’s smart cards business are among the so-called “primary deals” firms are eyeing up, people familiar with those processes said.

For private equity, the rewards can be greater than with companies that pass from one firm to another: the buyer can have the first go at cutting costs and optimizing performance, though the risks of failure can be higher.

Such deals also seem to go down better with some investors who have been particularly critical of the so-called “pass the parcel” deals that have been the mainstay of private equity activity for the last 18 months.

“The pipelines in Europe are more active than in the United States. I think there are more carve-outs to come. There is not a huge trend here but there is certainly more than there has been in the last 12 months,” one banker familiar with the processes said.

Also on the block is Schneider Electric’s Custom Sensors and Technology (CST) unit and France Telecom’s subsidiary Orange Switzerland.

Bankers also expect Fiat to sell Magneti Marelli, its auto parts division that makes everything from headlamps to shock absorbers.

While large corporates are seen as a potential source of new deals for buyout firms, cash-rich corporates also compete for the assets and can outbid private equity for companies thanks to the synergies they can extract.

“They sell a division and they have even more cash — what are they going to do with the money?” said one banker.

The result is they are putting their warchests into new acquisitions, he said.

Private equity firms fought hard for, but ultimately lost out to trade buyers, for AstraZeneca’s dental implants and medical devices business Astra Tech and Lafarge’s gypsum business. They also circled Synovate, the market research group Aegis has agreed to sell to rival Ipsos.

The sale of Aviva’s roadside rescue business RAC to Carlyle was a rare win for private equity, but no less competitive with the final price more than 10 times earnings before interest, tax, depreciation and amortization.

Private equity firms and their advisers are hoping they will have the advantage over pharma groups for GSK’s over-the-counter drugs portfolio, which includes painkillers, vitamin supplements and diet pill Alli.

Advent International, Cinven and Warburg Pincus are planning to bid for that portfolio, while rival pharma groups are only expected to be interested in cherry-picking certain assets, bankers said.

It’s the same story for PPR’s Redcats, with corporate buyers only likely to be bidders for parts of the portfolio of 17 fashion brands sold across Europe, the Americas and Asia, bankers said.

Oberthur’s smart cards business may provide another small ray of hope for private equity to win another deal soon. Two buyout firms are contesting that bid in the final stages, a person familiar with the situation said.

(By Simon Meads; editing by David Cowell)