Permira conquers new Galaxy

01 January 2008

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Permira's completion of two deals in Asia in October, its first in the region, represent the culmination of two years of effort to establish itself there. Given the situation in the debt markets for large-cap buyers, these deals are suggestive of things to come. Permira, and any one of its competitors, would struggle to carry off its preferred-size transaction in the current environment.

"While we are now seeing buyouts below EUR1.5bn making a comeback," explained Mark Soundy from Weil Gotshal & Manges, "many believe that we reached a high-water mark for the mega-deals earlier this year and that Boots-size deals will not be back for some time." One route mega-players are reported to be considering is to defy the gravitational pull up the value chain and drag themselves back down to the mid-market they once knew so well. Whatever their tactics, imagination is the prerequisite for success in the post-H1 2007 world.

Large private equity houses have been circling new geographies for several years: Permira set up a Toyko office in 2005; 3i has offices in Shanghai, Beijing, Hong Kong, Mumbai and Singapore, and Apax established an office in New Delhi in 2006, adding to its Hong Kong base which was established in 2005. With traditional European leverage buyouts off the menu for the time being, it is to be expected that their appetite for opportunities in Asia will accelerate. "Some financial sponsors are going to have to look further afield," Soundy confirmed. "Upper mid-market players, as well as large buyout houses are already looking much harder at Asia and emerging markets. In 2008, I expect to see a significant uptick in the number of deals done in those regions." LPs have already been driving the movement to Asia through their allocations. "Many European institutional private equity investors have increased their target allocations to Asia from the previous 4-5% to now typically 8-10% of their overall private equity allocation," said Stefan Hepp, a founding partner of SCM.

Permira's investment in Galaxy Entertainment, one of only six licensed casino operators in China, which also runs several casinos and a hotel in Macau, and its acquisition of Tokyo-based agribusiness Arysta LifeScience, would have taken place irrespective of the credit situation in Europe and the US, according to Permira's Chris Davison. With a Hong Kong office scheduled to open in 2008, it looks like Permira is going to be spending a lot more time in Asia Pacific and deals in the region may begin to account for a bigger share of its global activity.

Buyouts in the region are still relatively few and far between. "Doing deals in Asia depends on your ability to be flexible and accept that opportunities are often not traditional LBOs. The Galaxy investment, for example, was about working alongside a majority family owner," Davison explained. Via its knowledge of the gaming sector thanks to portfolio company Gala Group, Permira originated the Galaxy deal off-market and made a pure equity investment in return for a 20% stake. Cosmetically it might not look like a buyout, but the fact that Permira has an agreed strategy with the majority shareholders and takes two seats on the board means that, in practice, the buyout house is up to its old tricks. Other deals in the region have a similar appearance - recently CVC acquired a non-controlling stake in Chinese bottle maker Zhuhai Zhongfu and Warburg Pincus bought 11% of Indian electric equipment company Havells India Inc, also a quoted company.

Large buyout groups appreciate that taking advantage of opportunities in Asia requires flexibility and imagination. Against a backdrop of illiquidity in the debt markets in the US and Europe, those same groups will have to consider re-exporting their Asian tactics back to their core markets in order to get deals done there.