The lack of liquidity and pricing certainty in the debt market is seeing financial sponsors increasingly look at alternative lower leveraged investment strategies to put funds to work. JC Flowers’ targeting of UK insurer Friends Provident and TPG‘s acquisition of a stake in Russian pharmaceutical distributor SAI International – both announced last week – are typical of this trend.
While distressed opportunities are likely to be targeted in the secondary debt market, last week’s two equity-led moves are in capital-intensive business where investors see business growth as key to generating returns comparable with traditional LBO investing.
Although he has now walked away from the £3.5bn deal, JC Flowers did make an offer for a full buyout of UK insurer Friends Provident at 150p per share in cash. In a statement, the sponsor said it would finance the deal with a “conservative combination of equity and debt”, with the majority of the consideration funded with equity.
Last year, closed life fund Pearl Group mandated Bank of Scotland, BayernLB, Dresdner Kleinwort, Lloyds TSB and Nomura as MLAs and bookrunners along with MLAs HSH Nordbank and nabCapital to arrange a £2.3bn senior debt package backing the acquisition of Resolution for £4.98bn.
There, debt was by way of a structured investment grade loan with leveraged pricing, split between a five-year amortising term loan A paying 200bp over Libor, a six-year term loan B at 300bp and a seven-year term loan C paying 350bp. Resolution had been touted as a possible merger partner for Friends Provident. The deal is still in syndication.
The second deal of the week was in Russia, where TPG has agreed a US$800m all equity deal to take a 50% stake in leading pharmaceuticals distributor SIA International.
The deal is the biggest ever private equity deal in Russia, but tellingly is neither leveraged nor a full buyout. TPG will buy the stake from founder Igor Rudinsky, who will retain the other 50% and remains as CEO and will also serve as chairman of the board.
Part of the proceeds of TPG’s investment will go to finance the working capital needs of the business, which requires capital to finance its high growth. Russian corporate borrowers have seen their cost of financing climbing steadily higher over the past year, making a stake sale to a cash-rich equity investor an attractive alternative.
SIA’s 2007 revenues were US$2.7bn and it accounts for close to a quarter of pharmaceuticals distributed in Russia. The deal is TPG’s first investment in the region since it opened a Moscow office last year.
TPG’s decision to opt for a local partnership may well reflect the perceived difficulty for international operators of doing business in Russia, especially in potentially politically sensitive sectors such as healthcare. The all-equity deal means the sponsors will not access the leveraged finance market, which was decidedly lukewarm to Nidon Soki last year and would likely to be prohibitively expensive for a Russian deal in the current climate given the lack of a local bank market bid.