France struggles to play down SBO typecast

Greg Gille
11 March 2014

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The French buyout market has long held a reputation for seeing more than its fair share of secondary LBOs, and recent research by unquote” shows that this proved particularly true in recent months. Greg Gille reports

Secondary buyouts accounted for more than 60% of all buyout activity in the country last year in volume terms, and for more than three quarters (76%) when looking at the overall value of these transactions, according to unquote" data. This is up significantly on the 40% and 65% respectively recorded in 2012, already a high-water mark for "pass-the-parcel" activity in the country.

Most of the largest French deals completed in 2013 were secondary transactions, from BC Partners acquiring Allflex from Electra for $1.3bn, to Astorg selling OGF to Pamplona for around €900m and Bain buying Maisons du Monde in a €650m SBO. Save for the Kerneos spinout orchestrated by Astorg and the acquisition of Laboratoires Anios by Ardian, eight of the top 10 French buyouts of 2013 in enterprise value terms were sourced from fellow Gps.

Local GPs may find solace in the fact that France was not the only European private equity market experiencing an SBO surge last year. The UK also witnessed secondary transactions creeping up from 26% of all buyouts in 2012 to 36% in 2013. More generally, SBOs accounted for 40% of all European buyouts in volume, and 55% in overall value terms last year a marked increase on the 31% and 50% figures recorded in 2012.

Mature market
Should their investors raise an eyebrow at this fondness for recycled assets, French buyout houses will likely argue this is the unavoidable sign of a mature market, where many of the most alluring mid-cap businesses are likely to have already attracted the eye (and capital) of their competitors in the past. Focusing on "tried-and-true" companies that have already proved they are a good fit for private equity ownership is also a way to mitigate the risk associated with the country's current low-growth environment.

Nevertheless, these extenuating circumstances could be applied to a number of other European markets, and the fact remains that SBOs are disproportionally more prevalent in France. Not only did secondary transactions shoot up in absolute terms last year, their visibility was compounded by the increasingly dwindling number of buyouts sourced from private and family vendors; a phenomenon blamed by many market participants on both the fiscal uncertainty borne out of the 2012 elections, and a continued pricing expectation gap between business owners and private equity investors.

While the significant number of assets still sitting in fund portfolios are likely to remain a prime target for GPs eager to deploy their dry powder, local players are hopeful that the more business-friendly tax rates introduced in recent months will accelerate dealflow at the lower end of the market. "Most of the corporate finance intermediaries we are talking to at the moment are already seeing more business coming their way from private vendors," notes a Paris-based mid-cap player. The fact that private equity houses are increasingly bullish on pricing could also help entice sellers: according to the recently released Argos Mid-Market barometer, the median entry multiple recorded in lower mid-cap European LBOs rose to 7.3x in Q4, against 6.6x at the beginning of 2013.

In the meantime, GPs might also have more luck with another source of primary dealflow: corporate spinouts. Although French buyout activity has been eerily quiet in the first few weeks of 2014, the rare transactions that did come through already paint a slightly more balanced picture in terms of sourcing, and the most high-profile deals have been primary investments sourced from corporates such as the acquisition of ISS Espace Verts by Chequers for an estimated €130m and Ardian's contribution to the €1.96bn buyout of Vinci Park.

Secondary transactions have, meanwhile, accounted for less than half of all buyouts so far this year. The SBO tide may be ebbing for now, but time will tell whether this remains the case when the market inevitably hots up in the second quarter.