Take-privates back on PE’s shopping list

To many outside the industry, the take-private is the quintessential private equity deal. KKR's $24.9bn leveraged buyout of RJR Nabisco in 1988, immortalised in the bestselling book Barbarians at the Gate, is still justifiably held up as a fascinating example of transactions involving institutional fund managers. Yet, while such deals understandably generate considerable media coverage, it remains the case that they are among the rarest breed of private equity deal type.

European take-private deals have become rarer still over the past two decades, falling from a peak of 49 such transactions in 1999 to a 20-year low of 11 in 2016, according to unquote" data. Indeed as a percentage of total buyouts, the share of deals sourced via the public markets has decreased in each five-year period between 1997 and 2016; from 5.2% between 1997-2001; to 4.1% between 2002-2006; 3.7% between 2007-2011; and just 1.9% between 2012-2016. Notably, throughout each five-year period, transactions sourced from private vendors, corporate parents and private equity peers have comfortably outnumbered take-privates.

"The changes made to the takeover code following the [2010] Kraft/Cadbury process definitely made private equity houses more wary of public deals," says Kiran Sharma, a partner in the private equity team at legal firm Ropes & Gray. "This was partly driven by the risk of being put on an accelerated timetable to announcement in the event of a leak – as diligence and financing are obviously key to the private equity model and process – and the prohibition on offer-related arrangements, such as break fees. However, both of these issues can be dealt with by ensuring secrecy in the process and getting good strategic advice on how to limit the risk of a competing bid."

Making a bid
In contrast to the declining dealflow of the past 20 years, recent months have seen a number of bidding processes for publicly listed assets involving private equity firms. In the past few days, CVC and Blackstone launched a £2.9bn takeover bid for payments business Paysafe, sending the UK-listed company's share price soaring.

In June, Bain Capital Private Equity and Cinven Partners continued their pursuit of German pharmaceutical company Stada; BC Partners and Pollen Street Capital finally received the support of Shawbrook Bank's board of directors for an £868m take-over; and EQT acquired Swedish telecommunications and internet service provider DGC One in a SEK 2.3bn deal. Should the Shawbrook deal be successful, it would bring the total number of take-privates in the first half of 2017 to eight, up from four year-on-year and the highest H1 figure since 2010, when there were 11 such deals, according to unquote" data.

While the sample size remains relatively small, it raises questions as to whether the uptick in recent activity is indicative of an increasing appetite for public assets among private equity players. Sharma says Ropes & Gray has noticed changing attitudes towards take-privates in recent months: "There are take-private opportunities [within all segments of the buyout space], although the deals that can be executed with more certainty are likely those in the mid-cap space. As more private equity houses are seen to be playing in the public markets, it has and will continue to be seen as more of an opportunity for others. There is also an opportunity for financial advisers to track listed companies that are good targets and take them to private equity houses."

Steady as she goes
However, an industry insider who worked on a recent European take-private deal tells unquote" any perceived increase in appetite for take-privates is overstated. Instead, they argue, many private equity firms remain "nervous" about such deals, with the regulatory environment and changes to disclosure-related regulation rendering them more challenging: "The regulatory environment, with regard to early disclosure of approaches, continues to cause problems, as do high equity market prices and the lack of warranties available on peer-to-peer transactions. While there is no doubt that there are some undervalued companies on the market – and that such cases themselves might attract private equity bidders – public equity valuations in general are reasonably strong at the moment."

Indeed, the challenges of acquiring listed companies were laid bare by the aforementioned failed bid for Stada by Bain and Cinven. Despite receiving the approval of both Stada's management and supervisory boards, the private equity duo's €5.3bn EV offer was accepted by 65.2% of the company's shareholders, falling agonisingly short of the 67.5% acceptance threshold. At the time of writing, Bain and Cinven were in talks with hedge funds about the terms of a new offer for Stada, according to Reuters, which cited people familiar with the matter. However, any such approach within a year of the failed bid would require the approval of Germany's financial regulatory authority BaFin and recommendation from Stada's executive and supervisory boards.

The changes made to the takeover code following the [2010] Kraft/Cadbury process definitely made private equity houses more wary of public deals" – Kiran Sharma, Ropes & Gray

Yet, despite the challenges of acquiring listed companies, Ropes & Gray's Sharma argues that growing valuations in the private market are increasing the appeal of take-privates. Furthermore, she says changing attitudes towards the public ownership model from management teams at listed companies are also feeding through into the private equity deal-sourcing process.

"Valuations in private auctions continue to be very high, and with the continued need to deploy capital, private equity firms are having to be creative about how they source opportunities," Sharma says. "There are a number of listed companies, including those listed on AIM, whose business models are either not fully recognised by the market, or which are no longer suitable to be operated in the public environment – usually because long-term strategic investment is needed rather than a focus on short-term investor yield. There are also a number of management teams that are tired of running a business in the glare of the public eye and would much rather operate in the private sphere."

Take-privates in 2017
Company	Investor	Country	Value (€m)
Punch Taverns	Patron Capital	UK	2,100
Nordnet	Nordic Capital	Sweden	688
Transcom Worldwide	Altor Equity Partners	Sweden	240
DGC One	EQT	Sweden	236
Integer.pl	Advent International	Poland	100-250m est
DL Software	21 Centrale Partners	France	107
Circle Health	Penta Capital, Toscafund Asset Management	UK	64

 

While the challenges of executing take private deals are very publicly evident, the rewards can be fruitful, particularly for businesses looking to carry out extensive strategic repositionings. This proved to be the case for Terra Firma and its tenure of Infinis. The GP twice took the business private, with the latter deal enabling it to split the company and divest it for stronger returns than it had been achieving in the public markets. As Sharma says: "The advantages of a private equity owner are particularly relevant to companies that are at a strategic crossroads and would benefit from capital, strategic expertise – particularly if there is existing knowledge of the sector – and experience in the market."

It remains to be seen whether private equity firms are beginning to display a growing and sustainable appetite for acquiring publicly listed companies. Despite the uptick in such activity since the start of 2017, there remains a long way to go before take-private dealflow reaches the levels seen in 1999.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Deals
• Take Private