Grohe deal highlights changing attitude to PE in Germany

German firm Grohe was sold by TPG Capital and Credit Suisse's private equity arm DLJ Merchant Banking Partners to Japanese corporation Lixil and the Development Bank of Japan for an estimated €3bn at the end of last month. Grohe, acquired from BC Partners in 2005, was back then the prime example of a family-owned business bought by private equity and threatened by a heavy debt burden.

It was then that socialist politician Franz Müntefering sparked a major debate concerning private equity in Germany after comparing GPs to locusts. This negative image of devastating hordes of insects swarming over the landscape has stuck to private equity houses ever since. A high-profile transaction such as the latest Grohe deal would have traditionally generated a significant amount of concern for the firm as well as its employees from the public.

But things may be different this time, argues Tobias Schneider of CMS Hasche Sigle: "The locust debate still clings to the image of private equity houses after all those years. The metaphor came to light because of the Grohe transaction many years ago, but now it is obvious that the example was unjustified. The firm was sold last month and the GPs made use of a long holding period; they invested much capital and grew the business globally." Indeed, it seems as though many voices in the local media were ready to give credit where credit is due. In an article dated 26 September, the Neue Osnabrücker Zeitung praised the financial investors' work with Grohe, reminding its readers that profit-making is not reprehensible.

Reactions to the Grohe deal highlight changing attitude to PE in Germany

The Handelsblatt meanwhile highlighted Grohe as a prime example of a successful company turnaround under the helm of financial investors. Meanwhile, Badische Zeitung did criticise the great amount of debt pumped into Grohe (€800m of the €1.5bn deal) and the staff dismissals after the takeover, but also acknowledged private equity investments as a great opportunity for some businesses.

One of the criticisms levelled at the private equity industry in Germany is short holding periods, which seem too brief to genuinely improve business strategies and provide long-term growth. GPs have typically been conveyed as a greedy bunch who rush in and out as quickly as possible to reap maximum profits.

Evidently, Grohe's extended holding under TPG and Credit Suisse is now viewed in a positive light. The buyout duo took almost 10 years to divest the bathroom manufacturer – although it should be noted that the financial crisis and its aftermath forced TPG and Credit Suisse to keep hold of the company as a sale during that time was unlikely to be profitable.

Admirable expansion
Furthermore, Grohe's growth strategy has been widely admired. Developing from a small local business in Germany to an international player has been heralded as a great achievement. Under private equity, Grohe acquired China-based Joyou, a fellow bathroom equipment manufacturer, for €324m in 2011.

"It is indeed remarkable that the deal that originally unleashed the locust debate is now put forward as counter-evidence," says Network Corporate Finance's Christian Niederle.

In 2007, TPG and Credit Suisse came under increasing pressure again when the decision was made to relocate a large part of Grohe's production abroad. Andrew Dechet of TPG defended this move as an inevitable response to lacklustre profit margins and the pressures of international competition. But he also pledged to display more openness in the future.

Such a mea culpa might have encouraged a new attitude among local deal-doers: "Many investors now address topics such as the survival of the business and its employees as well as leverage more openly and transparently, paying attention to owners' reservations about private equity," says Niederle.

It may be too early to rejoice, but the image of private equity in Germany appears set to enjoy a makeover. As the Frankfurter Allgemeine Zeitung suggests, some family owners may finally realise the possibilities and opportunities that could arise from private equity investment. Funding provided by the industry may soon be seen as a valuable asset for companies, hopefully putting an end to years of well-documented scepticism.

The unquote" DACH Private Equity Forum is taking place on 10 October in Munich at the Four Seasons Kempinski Hotel. Click here to book your place

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