Take-privates thrive amid growing pressure to invest

While the number of listed companies has declined and IPOs have plunged, public-to-private P2P deals across Europe have hit a 10-year high, with private equity firms thriving and spreading into the public domain.

The unprecedented strength of the asset class, coupled with an increasing exposure of institutional investors to private equity and easier access to financing, has unleashed an abundance of capital flowing into private equity funds and requiring deployment. With this huge amount of capital to put to work, PE firms have turned their attention towards the public market, revitalising a source of dealflow that seemed destined to dwindle.

In 2018, the aggregate value of private equity-led take-privates hit €51.4bn, more than double the €24.5bn recorded the previous year, according to data from Unquote sister publication Dealreporter. This figure accounted for 20% of the total value across all private equity deals, compared with only 5.8% in 2017.

At a time when valuations are reaching record heights in the private space, high volatility and dull performance of public equities, affected by Brexit in the UK and political uncertainty across Europe, have made public companies' valuations more approachable. Furthermore, a take-private can sometimes allow private equity firms to avoid the fierce competition of a traditional auction process.

On Euronext, offers initiated by financial investors recorded a 7% increase in the first half of 2019, according to Alantra's public tender offers barometer. These included Five Arrows Principal investments' offer for Harvest, CVC Capital Partners' €900m bid for April, and the recently announced €365m offer made by Searchlight Capital Partners for Latécoère.

On the London Stock Exchange, Blackstone agreed to acquire theme park operator Merlin in a £4.77bn take-private, while Advent International bought Laird in a £1bn deal and subsequently launched a £4bn take-private for Cobham.

Meanwhile, in Spain, EQT bought Parques Reunidos, valued at around €1.1bn, and KKR launched a takeover bid to buy Telepizza in a €604m deal, and in Sweden CVC offered $2.6bn to buy Ahlsell.

Aiming high
With some funds reaching closings in the $15-30bn range, finding assets that are proportionally adequate can be challenging and the public market becomes the natural hunting ground for these giant players.

"There is a clear correlation between private equity fund size increases and the rise in deal sizes for take-privates. A market for single-handed, multi-billion P2Ps that was not addressable 10 years ago has now become available for such private equity firms," says Christian Hess at Investec.

For a company, the appeal of being privately owned can be a strong driver towards moving outside the public domain, especially when more value can be unlocked by being privately owned than by being constantly scrutinised in the public arena.

In several recent cases, companies taken private had been previously listed on the stock exchange via a private-equity-backed IPO. Some such examples are KKR and Telepizza in Spain, Blackstone and Merlin in the UK, and CVC and Ahlsell in Sweden.

This is often a sign of public market limitations in unleashing a business's potential. "Sometimes the public market is unable to appreciate the potential of a company, while being privately owned guarantees a higher degree of freedom to operate, away from the scrutiny of shareholders, the market and the press," says Hess.

There is a clear correlation between private equity fund size increases and the rise in deal sizes for take-privates" - Christian Hess, Investec

Despite their popularity, P2P deals present several challenges in origination and execution, can be very costly and complex, and can often fall through without making it to completion.

To make sure their offers are successful, PE firms have often pushed the premiums higher, a trend that seems to have picked up speed in the first half of this year.

In H1 2019, premiums on share prices reached a historically high level, with a 14% increase on 2018 and 53% on 2017, according to Alantra's barometer. However, even when the offer is appealing, a take-private can blow up for a lack of appropriate due diligence and a wrong turn taken in the approach to deal sourcing.

Hess says: "To ensure perfect execution, it is important to follow a cautious approach when targeting a listed company, and assess the bidding strategy on a case-by-case basis, because nine times out of 10 the target company is not for sale or has not yet taken a proactive decision to sell itself."

Taking a glance at the coming months, if stocks continue to fall into bear market territory, the number of take-private deals is likely to increase even further.

"On the supply side, the trend is becoming increasingly pronounced," says Hess. "Furthermore, on the demand side we expect listed companies and their shareholders to become more open-minded and look at the high level of value creation available in the private domain."

Nevertheless, in the long-term, the frenzy for public assets might eventually bolster listed company valuations and contribute towards reestablishing a healthier balance. This is likely to happen given that the interest for listed assets is spreading to smaller-sized funds as well.

Alantra's Irfan Iqbal says: "Several smaller funds in the $500m-1bn size are showing interest in the public market, especially if they are willing to invest in Europe. This is why we expect that, over time, an increasing number of smaller private equity firms will employ this strategy, especially in global geographies." 

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