La Bourse - French private equity’s public enemy no. 1?

AFIC’s recent study ‘Le PtoP a-t-il un avenir en France?’ reported that over the last five years an average of only six delistings per annum took place in France, compared to 39 per annum in the UK. IPOs have proved notoriously difficult for French companies – a situation highlighted by IDM’s move to a Nasdaq listing. In the UK, AIM is faring increasingly well, but in France the lack of activity on the Nouveau Marché has led to the complete overhaul of the Euronext list. Will the imminent launch of Alternext ease the trepidation of French investors?‘It boils down to culture,’ declares Stéphane Sabatier of Willkie Farr & Gallagher; ‘Some French investors still distrust the stock exchange. It dates back to the burst of the Internet bubble - the confidence of small and mid-cap companies has not yet returned.’ Only in March, the Paris-based biotechnology company IDM signed a definitive agreement to merge with US group Epimmune, in order to achieve a listing on the Nasdaq stock market. The company said its decision was prompted by dire fundraising difficulties facing small companies in France, which forced it to abandon a flotation on the Paris bourse last year. Following the transaction’s closing later this year, IDM will move its headquarters to San Diego. Alain Caffi, chairman of AFIC’s venture committee, maintains that the problem is linked to a lack of domestic investors willing to back long-term development. ‘Potential foreign investors were turned off by the lack of appetite on the French market.’ He surmises, ‘a lot more local equity is required in companies with ambitious and long term prospects.’

The grim situation is highlighted by the fact that a meagre four biotechnology stocks exist in France, compared to more than 300 in the US or 50 in the UK. The last biotechnology company to float in Paris was Nicox in 1999. France's most promising high-tech companies seem either to move to the US, such as software developer Business Objects, or get snapped up by foreign rivals, such as Kelkoo, which was purchased by Yahoo for EUR 425m in June 2004.

Michel Rowan, of Banexi Capital Partenaires, blames the restructuring of corporate finance boutiques over the past few years for the waning interest in mid-cap companies. Rowan also alludes to the worrying phenomenon of French lock-ups, which virtually prevent a majority block of shares becoming listed all at once. ‘When companies are listed, the French financial authorities more or less impose this restriction,’ Rowan asserts. ‘It paves the way for hedge funds to corrupt the market before the remaining shares are able to exit.’

In a bid to improve the investor-friendliness of the stock exchange, AFIC has recently put forward its proposals for JEIC (Jeune Entreprise Innovante Cotée) to the French government. The initiative has been devised to complement JEI (JeunesEntreprise Innovante). The latter legislation was designed to boost investment in high-tech companies by providing them with significant tax and social security exemptions. Investors unanimously agree that the decree, which took effect last summer, has proved very fruitful in encouraging investment activity in SMEs. In a similar way, the proposed plans for JEIC will exonerate investors from paying taxes on capital gains and give additional benefits to private investors, such as ISF and inheritance tax reduction. Caffi enthuses; ‘this provides a very strong incentive for local investors to commit to innovative, quoted companies’. The government is currently reviewing the costs inherent in absolving investors from tax obligations, but as the Ventech chairman points out, ‘a new market will be created which is not there now, so there is nothing to lose.’

Euronext has sought to facilitate access to the French stock exchange via Alternext. An unregulated exchange modelled on London's AIM, its listed companies will be bound to respect financial transparency requirements. Aimed at improving the visibility and liquidity of small and mid-cap companies, Alternext will officially open for business on 17 May. Stéphane Sabatier of Willkie, Farr & Gallagher, views the project positively; ‘It’s a controlled market, which will be more accessible to smaller companies not yet ready to join a regulated market.’ Alain Caffi, chairman of AFIC’s venture committee, views Alternext as a good complement to Eurolist. ‘It suits smaller companies very well’ he elaborates, ‘there is far less red tape on Alternext’. Most consider Alternext as a stepping-stone for companies wishing to broaden their investment opportunities.

The creation of Alternext represents the last in a series of significant changes implemented by Euronext to improve the structure of the Paris stock market. In January 2005, Premier Marché, Second Marché and Nouveau Marché were replaced by Eurolist. Many investors view this reorganisation as a marked improvement. As Stéphane Sabatier remarks, ‘the single regulated market is easier to read and has greater appeal to potential investors.’ Companies are classified in alphabetical order and are identifiable by market capitalisation, making it easy to locate small-caps (market capitalisation under EUR 150m), mid-caps (EUR 150m to EUR 1bn) and large-caps (over EUR 1bn). Alain Caffi considers that a single market will become far more attractive to stock pickers and therefore help to promote company growth.

Although it is debatable whether such hefty structural changes are enough to inspire renewed interest from private equity houses in quoted companies, it is not by any means the only solution. The role of Europe Finance Industries (EFI) has been of considerable significance in increasing activity on the stock exchange. A pioneer of its kind, the group has listed more than 300 French companies over the past 18 years. Founded in 1988, the independent investment bank has floated around 25% of the firms currently quoted on Euronext Paris. EFI’s executive chairman, Rémy Thannberger, maintains that the group owes its success to the lack of support available for small and mid-caps in France. ‘Large investment banks like Cazenove don’t bother with companies valued at less than EUR 150m’, he adds. In an interesting turn of events, EFI has become increasingly approached by private equity funds, eager for guidance in preparing portfolio companies for Euronext Paris. Thannberger has recently been contacted by a Swiss fund in the UK looking to float a French SME. He accredits the surge of interest from institutional investors to the fact that venture capital has shifted from being antagonistic to the stock market, from when it emerged in the early 1980s, to complementary. He also points to a certain internationalisation of the market over recent months, with 50% of EFI’s floatations on Euronext Paris involving UK firms. EFI has also become one of Alternext’s listing sponsors - a brand new category of market participants that will advise applicants on preparing for a listing and provide guidance to the listed company. Alternext presently has seven listing sponsors: Arkeon Finance, Avenir Finance Corporate, CM-CIC Securities, Oddo Corporate Finance, Société Générale and Sodica.

Thannberger explains that the French’s general lack of interest in the stock market can be accounted for by a misunderstanding of how it works. ‘They do not understand the culture of the market and are afraid of being exposed’, he declares. Michael Diehl of Activa Captial, on the other hand, begs to differ; ‘A number of companies with sub-EUR 100m market caps are realising that it is expensive and time consuming to be quoted when you have little or no investor appetite for such companies.’ In light of criticism of the lack of French public-to-privates, AFIC is lobbying for legislative changes to facilitate moves to private ownership. The study claims that 90% of CEOs involved in French public-to-privates over the last five years have been entirely satisfied with the transaction and that a lack of liquidity is no longer a problem for shareholders. It also reports that around 55% of quoted French companies have a market capitalisation of less than EUR 100m, which is of little interest to the stock markets. AtriA Capital Partenaires has demonstrated its confidence in take-privates of small-cap companies, by backing three such deals over the last three years. Its recent EUR 59.3m public-to-private of Parcour follows the group’s delisting of FPEE in 2003 and Philippe Bosc in 2002.

Hervé Claquin of ABN AMRO Capital agrees in the futility of EUR 50m companies being listed. ‘It’s often for all the wrong reasons. Owing to poor liquidity, the listing of such companies doesn't help in the financing of growth or acquisition.’ he elaborates. However Claquin criticises the restrictions facing private equity houses that wish to back take-privates. A major drawback for investors is the exceptionally high squeeze-out rate in France. In the UK, 75% of shares need to be purchased before a public offer can be launched, whereas some 95% of the shares need to be purchased in order to delist a company in France. If an investor acquires more than a 33% interest in a listed firm, the French investor is required to launch a compulsory offer to purchase the shares of minority shareholders. In the event of exceeding a predetermined threshold of either 51% or 66%, the investor is obliged to purchase the shares, regardless of whether the prerequisite 95% to delist has been attained. Such an onerous squeeze-out rate is a major deterrent to private equity funds. In 2003, PAI tried to back the take-private of GrandVision, but relinquished after failing to secure 95% of the shares. The following year, HAL Investments succeeded in delisting the company for EUR 525.8m.

Despite the knock-back, PAI Partners was not discouraged from reattempting a take-private and its perseverance paid off with the successful acquisition of Vivarte in March 2004. After purchasing 56% of the group’s share capital from its owners, the group launched a compulsory offer and gained an interest in excess of 95%, enabling it to delist the company. Stéphane Sabatier, who provided legal advice for the deal at Willkie Farr & Gallagher alongside Daniel Payan, commented that the fruitful outcome was partly due to the premium included in the offering price. Vivarte was acquired for EUR 1.144bn, comprising EUR 803m of debt from a banking syndicate led by Royal Bank of Scotland. Nevertheless, Sabatier hastens to add that a good offer does not guarantee success. He explains the importance of analysing the composition of shareholders in a quoted company that is a potential purchase. ‘In the case of Vivarte there were three or four major blocks of shareholdings, thus facilitating the task of selling.’ He continues, ‘when a company has lots of smaller, more fragmented shareholdings, the process of convincing investors to cede their share is far more complicated’.

Another obstacle to private equity funds looking to complete a public-to-private in France is the growing tendency of hedge funds to unsettle or block proceedings. Hervé Claquin remarks; ‘hedge funds enjoy pipping private equity funds to the post by buying shares in quoted companies’. He warns, ‘stock market shares are doing badly at the moment, which paves the way for hedge funds.’ A notable example is AXA Private Equity’s attempted bid to acquire a 95% equity stake in Camaïeu. The group had purchased a 40.06% control of Camaïeu’s capital from its founding family shareholders at the end of January through its holding company, Financière Addax. However, the British management group Sandell acquired 10.43% of Camaieu’s capital at the last minute. Sandell announced that it would continue to purchase tickets in the company over the next 12 months, thus preventing AXA’s delisting of the company.

The picture is not by any means entirely pessimistic. Clayton, Dubilier & Rice, Eurazeo and Merrill Lynch Global Private Equity managed to complete Europe’s largest ever public-to-private transaction in March 2005. The syndicate acquired a 98.5% equity stake in electrical wholesaler Rexel for EUR 3.7bn. Following the purchase of a 25% interest from minority shareholders, the group managed to secure a 73.5% block of shares from Pinault-Printemps-Redoute to achieve its delisting.

Additionally, the motorway company Autoroutes Paris-Rhin-Rhône successfully completed its IPO in November 2004, raising nearly EUR 1.3bn and resulting in a 29% free float. Stéphane Sabatier who worked on the deal at Willkie, Farr & Gallagher agrees that the successful outcome could restore confidence in French investors.

The current high level of liquidity in the French market and the prevalence of billion euro funds promises to provide greater investment opportunities. In AFIC’s annual conference in April 2005, it was rumoured that the forebodingly high squeeze-out rate may be reduced to 90%. Michael Diehl of Activa Capital adds, ‘it would help if the 95% ownership rate for fiscal integration were reduced too.’ He dismisses the idea that the French stock market is not investor friendly, but suggests that ‘increasing costs and regulation combined with less analyst coverage and lower investor appetite, should lead to fewer micro caps being quoted on the stock market’. In relation to IPOs he warns; ‘the quoted company should be of a sufficient size as to attract true institutional investors and not become hostage to its own fortune.’

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