UK Take-Private Buyouts To Reemerge

There have been some signs of revival in the public-to-private buyouts market that has been virtually shut for more than a year, private equity companies say, as institutional investors seek a way out of companies whose share prices have dropped.

There has been a pick-up in business in just the last couple of weeks, with two public-to-private deals going into the due diligence phase, said private equity partner Andrew Roberts at law firm Travers Smith.

A slow drip-feed of liquidity back into the system next year could give more impetus to the market for mergers and acquisitions (M&A), he said. But he refused to comment on the deals under question.

“It’s still going to be relatively small deals in the hundreds of millions rather than the billions,” he said.

In the first nine months of 2008, there were only 15 public-to-private buy-outs in the United Kingdom, according to figures from the Center for Management Buyout Research, with the 2 billion pound buyout of EMAP the largest of only three buyouts worth more than 1 billion pounds.

This contrasts with the 24 public to private deals made last year, including the European high watermark deal – the 11.1 billion pound KKR-backed takeover of Alliance Boots.

And there is a precedent for a rise in this type of deal after a sharp fall in asset values. Toward the end of the dotcom boom, there were 46 public-to-private deals in 1999 and 42 in 2000, accounting for 27.6 percent and 39.1 percent of total buyout deal value respectively. That total includes other deals between private equity firms and buyouts by privately-held companies.

Private equity firms have to put in more of their own money when buying a company with borrowed cash, and the size of such leveraged deals has dropped dramatically, after the credit crunch slammed the door shut on credit markets.


Private equity firms are hoping tight financing conditions may bring back the heady days. With IPO markets shut and a mountain of refinancing awaiting already tight corporate debt and loan markets, companies have few options.

“Large shareholders are hugely important in these types of deals,” said Travers Smith’s Roberts.

“(They) have been actively encouraging private equity institutions, who they all know, and management teams at public companies to see if there is a way they can access the private equity market to get some liquidity,” he said.

The FTSE 100 has slumped by a third already this year and large institutional investors are set to dominate shareholder registers as the hedge fund industry shrinks and retail investors continue to stay away.

“Now that prices have come down on the listed market it will open up the possibility of doing public-to-privates – you also have willing vendors,” said Richard Chapman, a partner at mid-market private equity firm ECI Partners.

“There is a desire by institutional investors to pull out of the smaller and mid-cap companies.”

Sam Hart, an analyst with broker Charles Stanley, said he believes investors in any quoted company would be extremely pleased to see interest from private equity firms.

“I’m sure they would look extremely favourably on any approach, and as long as the offers they were making for companies represented a reasonable premium to the current share price, I would have thought they would be quite inclined to accept those offers,” he said.

But while there is scope for a pick-up, activity may not restart until the New Year once banks get reporting of their 2008 balance sheets out of the way and there is an easing of bank debt, Chapman said.

Chapman’s assessment was borne out by 3i Group Plc chief executive Philip Yea, speaking after the London-listed group reported its half-year results.

“My own guess that for the right transactions, the next calendar year credit will be available but it probably needs to get through year end,” he told a conference call.

Source: Thomson Merger News