Private Equity’s Mixed Signals

Financial buyers may be somewhat subdued in the current uncertain credit markets but deals are still being done. This morning US private equity house Clayton, Dubilier & Rice succeeded in picking up the industrial testing division of UK mid cap engineer Bodycote.

Clayton, Dubilier & Rice won what looks like quite a competitive process, seeing that it was prepared to pay £417m (US$767m) or 20 times the £21m operating profits that the business made last year [or 13x 2007 EBITDA, and 9.5x-10x expected 2008 EBITDA]. The resilient nature of the activities that Bodycote’s testing division undergoes doubtlessly made it an attractive asset to sell.

Clayton, Dubilier & Rice’s chief executive Donald Gogel confirmed as much saying the business “exhibits the key characteristics that we look for in all of our investments” namely “a market leading services business with customers in diversified and resilient industries”.

Gogel added: “Our ability to execute this transaction in the current environment reflects the flexibility of CD&R’s operating model”.

Bodycote is not the only FTSE 250 engineer that has succeeded in divesting a valuable asset to a financial buyer at a high price lately. Earlier this month Hunting offloaded Gibson Energy, its Canadian oil and gas transport business to Carlyle and its linked energy sector specialist fund manager Riverstone.

Hunting managed to pick up £626m (CAN$1.27bn) for this asset. Again this deal was struck at a healthy multiple of nearly 13 times the business’s £48.4m operating profits last year. That reflects the booming nature of its activities too, operating oil terminals, pipelines, road tankers and a refinery.

Notably, some of the other major buyouts this year have also involved somewhat recession-proof businesses, such as oil services group Expro, bought by Candover for £1.8bn, and healthcare mobility aid maker Tunstall, acquired by Charterhouse for £514m.

However, whilst assets such as these look likely to find a buyer whatever the weather, others are finding the current funding climate more debilitating to their dealmaking, as the drawn out and, in cases, inconclusive, auctions of Reed Business and Informa have shown.

Overall though, private equity companies remain reasonably positive. Yesterday Candover Investments chairman Gerry Grimstone said: “Although no company can be immune from the economic pressures facing Europe, our portfolio is in good shape, and we continue to believe that this is a good time to invest with company valuations and debt multiples back to more sensible levels. Realisations, however, will be harder to achieve.”

He pointed to the acquisition of Expro showing that “Candover is very much open for business despite the credit crisis” but admitted that overall “European buyout market activity in the first half of 2008 was significantly lower than during the first half of 2007, with values down by more than 58% from €115bn to €48bn”.

“This was largely due to a shortage in the availability of debt for the larger transactions that historically have accounted for the majority of the market in value terms. We expect the difficult market conditions to continue in the second half, and we anticipate that the buyout market in 2008 will be significantly behind the records set in recent years”.

The value of the group’s investment in bingo-to-bookies conglomerate Gala Coral is now worth less than half its initial cost.

Similarly Ross Marshall, chief executive of smaller manager Dunedin, this morning said that whilst realisations might slow over the medium term “as exits at attractive prices are less likely” there will also be “good buying opportunities which are more attractively priced than in recent years”.

Private equity looks likely to enjoy such mixed fortunes for some time to come.

This post originally appeared at Thomson Merger News