Southern Europe Sunshine

(This feature is taken from Private Equity Europe, the pan-European publication from the publishers of unquote")

Last year was dire for the European buyout market. Q4 figures were officially the lowest for a decade, with deal value sliding 59% against the preceding three months to just over €8bn - the lowest quarterly total since Q2 1997. The UK - once Europe's mighty buyout powerhouse - fell to its knees: during December the largest buyout was a poultry £20m.

Southern Europe, however, was conspicuous by its strong performance. In fact Italy recorded an increase in deal activity and value, even as every other country saw both plummet; most by around 50%.

And Italy is in buoyant company in the region - in the fourth quarter of last year Portugal was home to the €1.2bn buyout of renewable energy utility Enersis. The deal was not only noteworthy for its size but for its sector: it marks Europe's largest private equity-backed takeover of a wind farm. Perhaps most impressive, it managed to attract four blue-chip lenders: BBVA, Banco Espírito Santo, Caixa Geral and Banco Comercial Portugues.

"The strong local network of the Southern European buyout market is tightly interwoven and has strong ties to the banking sector - which itself has been less affected by the economic downturn - and this helped the region to maintain and even pick up pace in 2008," suggests Emanuel Eftimiu, European research manager at unquote".

The buyout was backed by Iberia's new kid on the block, Magnum Industrial Partners, set up in November 2007 by Santander's Angel Corcóstegui and Baldomero Falcones, formerly of Mastercard International. The fund closed on €866m, comfortably surpassing its €800m target.

It has been active since inception, closing its fifth deal last month when it backed the MBO of Portuguese pharmaceutical chain Generis. The deal was structured roughly 50:50 debt to equity split, commonplace in today's leverage-lite backdrop, with debt provided by Banco Espírito Santo Investment, Banif, Caixa Peral de Depósitos and Banco Santander. More noteworthy, however, is what appears to be a hefty price tag: the €208m enterprise value represents more than 10x the company's €20m Ebitda.

Top of the (asset) class?
Despite the region's apparent decoupling from the rest of Europe vis-à-vis deal activity, there are similarities; namely a fascination with infrastructure. Indeed, the Enersis mega deal was one of many recent disposals by beleaguered Australian infrastructure fund Babcock & Brown. Private equity firms are also eyeing up two parking lots in Spain. Bridgepoint is said to be looking at Ferrovial's Cintra, in a deal that could value the business at €500m. Separately, newcomer ProA is said to be interested in Acciona's parking lot, valued at around €200m.

Infrastructure appears to be in everyone's good books, with fundraising reflecting this trend. Santander continues to raise its €1.5bn infrastructure fund - although neither a date nor a target for a first closing has been set, while it had to suspend the fundraising for its fund-of-funds in September last year due to a lack of LP appetite. Australian financial services group Macquarie is also believed to be raising two new funds, Macquarie Infrastructure Partners II ($6bn) and Macquarie European Infrastructure Partners III (€5bn).

And increasingly global private equity giants are making forays into the space: Blackstone Group is in pre-marketing for a $3-5bn infrastructure fund (just two months after abandoning plans for a $5bn Indian infrastructure vehicle); and KKR is reportedly raising anywhere from $5-10bn, having announced its move into infrastructure last May.

Yet, when it comes to infrastructure, it cannot all be put in one bag. "Banks are differentiating between renewable energy-related infrastructure and the disposal by large construction company's of non-core assets," says Neil Collen, partner at Livingstone Partners' Spain office. "Project financing for renewable energy assets is less difficult to obtain as it contains little risk - national utilities providers must acquire the energy at above market rates. The same cannot be said of other type of infrastructure."

Moreover, infrastructure alone is not going to be enough to see buyout activity in Southern Europe maintain a healthy flow. "Between the credit crunch and the recession, difficulties in finding comparables for valuations, and the time these are taking to carry out, the number new PE-backed acquisitions - or even add-ons - will be low," observes Eugenio Morpurgo, CEO of Italian corporate finance advisory Fineurop Soditic.

Already, YTD figures for Q1 2009 show private equity activity has experienced a considerable drop from Q4 2008, which (in contrast to the full-year figures) was already slow. "Activity will be scarce: 2009 looks like a year for re-capitalisations and rescue finance," Morpurgo adds.

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