Sell! Sell! Sell! - The buy-out boys are back
The buy-out boys are back – and they're champing at the bit to take their firms public. Who will be first?
Sunday 18 October 2009
Private equity has scaled the heights and plumbed the depths in the past decade. Fuelled by a cocktail of cheap debt and galloping asset prices, private-equity bosses scooped billions in profits at the top of the market in 2006. Any fool could do it.
But, just one year later, the seemingly endless success enjoyed by these often secretive money men came to a juddering halt. With the banking system seizing up in the summer of 2007, the easy money that fuelled the private-equity boom disappeared.
And so did most private-equity firms. Many retreated back into the shadows whence they came. Others went out of business altogether.
But as global markets edge out of recession the buyout boys are back. Blackstone and Permira, two of the world's most powerful private-equity firms, revealed plans last week to flip many of their currently private investments back into the public arena with a raft of flotations.
As global equity markets continue to march on – the FTSE edged toward 5,300 last week while New York's Dow Jones index broke through the 10,000 barrier – buyout firms are eyeing exits for their often troubled firms through public listings.
"Many private-equity firms were looking for some solidity in equity markets and they seem to have found it," said one banker working on a raft of private-equity sponsored listings. "There is a hell of a pipeline of companies out there waiting to be flipped, so the game now is to be the first. Like the rights issues, if private equity firms wait too long, they risk missing out."
Stephen Schwarzman, Blackstone's founder, revealed in a letter to investors that as many as eight of the firm's big buyouts are set to take their bow in the public arena.
And Permira's co-managing partner, Kurt Bjorklund, speaking at the British Private Equity and Venture Capital Association annual conference last week, also said that the group, which has been hit harder than most during the downturn, was planning a number of listings and sales.
"I am not going to play the game of listing all the companies we are preparing for flotation," said Bjorklund. We do have a number of companies we are working on preparing to list or trade sale [see box]."
But the City is already playing the guessing game, and the sheer diversity of companies likely to be floated is staggering.
The first three Blackstone flotations out of the blocks are likely to be TeamHealth, a US business that provides medical staff; Travelport, which provides the technology for firms specialising in online holidays; and Merlin Entertainments, the Dorset-based leisure business that has attractions such as Madame Tussauds, Chessington World of Adventures and the London Eye in its portfolio.
Other investments that have been touted as possible flotation candidates further on include United Biscuits and Tragus, the firm behind the Café Rouge and Bella Pasta chains. But TeamHealth is a definite, as Blackstone filed for a New York listing earlier this month. The private-equity giant is looking to raise around $100m from the move.
Travelport has been yearning to list in London since before the market collapsed two years ago. Management even relocated the business to the UK to make it more appealing to potential London investors.
Finally, its chief executive, Jeff Clarke, is close to fulfilling that wish, and has hired Citi, UBS, Deutsche and Barclays to handle the private-to-public switch. Only a portion of the company is expected to be floated, though, with Blackstone likely to earn around $2bn.
It is Merlin, however, that has the London market talking. When private equity was getting battered by the Treasury select committee in 2007, during which the industry was essentially accused of asset stripping, the British Venture Capital Association used Merlin to counter the accusations.
From a small business called Vardon Attractions that essentially concentrated on the Sea Life brand, it has grown into the second-biggest entertainment group in the world – only Disney beats it – and is now hailed as a job creator.
After a summer of informal pitches from banks wanting to get in on the deal, it is understood that advisers will soon be selected. A market source suggested that Deutsche, Citi and UBS are favourites.
Whoever gets the job will be the envy of other leisure bankers. As one puts it: "This is one of the best leisure companies in the UK. The listing is going to be a great one."
A fourth candidate is TDC, the Danish telecommunications giant. Four years ago, Blackstone was part of a private equity consortium that paid $15.3bn for TDC, the biggest leveraged buyout in nearly two decades.
Private equity typically sells on its portfolio companies three-to-five years after purchase, so the chatter surrounding TDC makes sense, though such a big company could be difficult to list should the market surge soften.
Permira, which was also a member of the TDC consortium, has plenty to offload after two years when the value of many of its investments has plummeted. The group was forced to write down its portfolio by 36 per cent, while some individual investments are now probably worthless, including bingo hall operator Gala Coral; Ferretti, the Italian yacht-maker; and Cortefiel, the Spanish clothing retailer.
But it's not all doom and gloom for Damon Buffini and his team. No frills retail chain New Look, which Permira co-owns with Apax Partners, is likely to be floated for more than £1.5bn.
Acromas, which owns the AA auto brand and Saga, the over-50s holiday and insurance group, as well as Birds Eye Iglo are both likely to be flipped in the first half of 2010 too.
Cinven, the British private-equity firm founded in the 1970s, is also thought to be readying itself for a number of possible listings, including the travel group Amadeus, which it bought for €€4.4bn with BC Partners, while Gondola, the group behind the Italian food chains Pizza Express and Ask, which it bought for around £1bn at the end of 2006, could also be punted.
Mid-market and smaller private-equity firms are looking to get in on the listings bonanza too.
Bridgepoint recently hired the investment bank JP Morgan Cazenove to advise on the possible flotation of Pets at Home, the accessories-for-animals retailer. The sale could yield the company as much as £700m.
"Just about everyone is going to try to get a listing off in the next year or so," said one senior banker. "But they're not all going to get through, just be prepared for that."
City advisers and lawyers are currently working round the clock to help private-equity firms begin preparations for listings, although the process is often quite tortuous.
"There really needs to be a dose of realism on price by some of these firms," says one leading mergers and acquisitions lawyer at a magic-circle firm. "I am having to tell these private-equity guys that they can't inject their financial trickery into listings – no convertibles, layers of equity. It just needs to be simple if it's going to float. Some just don't get it."
Getting flotations away will also rely heavily on support from the City's put-upon fund managers, many already fatigued from helping firms shore up finances through billions in rights issues. Having been burned on listings before, traditional stock-market investors are likely to be choosy over which they back.
Henry Kravis, founder of KKR and one of the founding fathers of private equity, said in 2007: "Any fool can buy a company; you should only be congratulated when you sell." Words the industry would do well to heed in the middle of this frenzy.
Mergers are also back on the agenda
The private equity crew at Blackstone are not just eyeing up flotations: according to the Schwarzman letter, the mergers and acquisitions (m&a) market has opened up too.
Schwarzman mentions five portfolio company sales, four of which have been announced while the fifth is imminent.
It is believed the last refers to Kosmos Energy, a Dallas-based oil company. ExxonMobil has locked horns with China and Ghana's national oil companies to buy Kosmos's 23.5 per cent stake in its massive discovery, known as the Jubilee Field, off the coast of West Africa. Part-owned by Blackstone, Kosmos can expect to get more than $4bn for the field.
Blackstone also sold 57 per cent of its stake in Cineworld, the British cinema chain, for £62.9m last month. And in April, a time when sellers were still cautious, GlaxoSmithKline bought Stiefel Laboratories, a US-based dermatology specialist, for $2.9bn. Although the company was majority owned by its founding family, Blackstone held a minority stake.
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