Trade buyers regain lost turf

This year has seen a dramatic drop in secondary buyouts compared to 2007. In fact, as EVCA celebrated vibrant results for last year, it became apparent that for the first time the number of secondary buyouts surpassed trade sales in Europe. For several years, the value of sales to other institutional investors had risen significantly, reaching a peak in 2007 before the sudden collapse. Secondary buyouts have dropped from EUR42bn in 2007 to just EUR7bn in the first half of this year.

In comparison, the fall in trade sales could go unnoticed. In Benelux the EUR1bn InterGen sale by AIG Highstar to Indian infrastructure developer GMR and the EUR750m ABX Logistics sale by 3i to Nordic trade buyer DSV will boost figures, and trade sales will almost certainly prove to be the exit of choice for this year.

Corporate finance firms already agree there is a fairer balance in auction processes, giving trade buyers the opportunity to regain the part of the M&A pie that they lost sime time ago.

The price war: losing the trump card

Easy access to debt had allowed private equity to outstrip trade buyers in auctions in 2006 and 2007. Trade buyers' once strong ability to pay premiums for strategic synergies fell to private equity houses, which often relied on sophisticated financing engineering, and in doing so, often increased prices. Trade buyers, which traditionally finance acquisitions off their balance sheets, were ultimately defeated by private equity houses that could afford to pay premiums thanks to cheap debt.

This all came to an end last summer, when the credit crunch drove GPs into difficulties, staving them off to outbid endlessly because they could not leverage as quickly and easily as before. The crunch-induced lower and fairer valuations have provided trade with a competitive price advantage. However, Michael Reeves at Clearwater notices that "private equity is still a very competitive sector that keeps the prices up."

That trade buyers can pay strategic premiums over private equity dates to before the credit crunch. Tim Raffle at ECI notes that "three to four years ago, private equity houses would pay more. But trade buyers become more aggressive and competitive in terms of price when there is a strong strategic logic for the acquisition."

Even if private equity has lost its cheap-debt advantage, several GPs still have money. Record funds raised in the past few years - and the pressure to deploy them - should enable them to remain competitive. "Private equity firms have raised large funds in recent years which they still need to invest," says Michael Abraham at UBS. "In a market where larger buyouts are harder to complete they are now more willing to look at 'non-traditional' situations, including taking minority stakes." This may work particularly well in some markets which are of less interest to trade buyers. Lately we have seen a consortium led by 3i take a minority stake in pan-European medical diagnostics firm Labco.

In this price battle to find the money to support bids, Clive Owen of NVM comments "as markets 'unfreeze' and price expectations adjust, I expect to see leveraged transaction levels increase - this might take awhile, though."

Strategic battle

With access to debt being more tricky, the credit crunch has meant that private equity houses are today "more disciplined; they take a more conservative view on the business outlook and exit multiples, on top of reduced leverage," according to Abraham. This should profit trade buyers directly. If private equity can now be easily challenged on price, even the foundations of their strategy have been unhinged.

"Private equity firms, as routine buyers of businesses and auction participants, generally can get to the finish line faster than strategic buyers," says Abraham. Trade buyers used to lag behind in sale processes, but learned some tricks to get back into the game. "Some trade buyers in recent years have hired M&A bankers and are now more 'savvy' in auction processes."

This very common viewpoint is not shared by Mike Reeves at Clearwater: "I don't agree that trade buyers are slower than private equity firms. If they really want or need a business, they will be very quick. We did sell businesses to trade buyers in record time. For example, the sale of Allen and Heath was completed in only 12 weeks start to finish. Furthermore, trade buyers are in the business, requiring less commercial due diligence." Also, another GP adds that trade buyers are often more detailed in their offers, which could explain their lack of swiftness.

In these changing times, Abraham notes that, "when advising on a sale in the current markets we allow more time for private equity funds than was the case as it tends to take longer to get their funding in place." This should help trade buyers to polish their strategy.

What Reeves notices, however, is that "private equity houses remain very confident. They know exactly what they can offer to the target and how." This is particularly the case with the questions of management. Private equity will usually offer to keep the management team, which can be very different to trade buyers, who tend to replace them more often. GPs recognise that the wishes of the management team are very important factors to be taken into consideration. "If we sell a business, the management team can be very reluctant to deliver sensitive commercial information to trade competitors, making negotiations with them more delicate," Raffle explains.

Private equity's artillery has suffered a real blow, forcing them to retreat into conservatism. Trade buyers can rejoice, but should be careful with their regained influence. Private equity has proven that it often has more than one trick up its competitive sleeve.

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