The fast show: accelerated IPOs leave private equity firms standing

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The Independent Online

As anyone who has sat up all weekend trying to close a deal will testify, you can't hurry the City. Bidders, bankers, brokers, advisers and lawyers all get their say, and the whole process gets mired in minutiae.

Last week, however, a takeover discussion was transformed into the fast show. Business-to-business publishing house Centaur Communications, owner of The Lawyer and Marketing Week, has entered into exclusive talks to be acquired by the broker Numis Securities for a reputed £140m. So far, so normal. The novel part is how it is financing the deal.

Numis has opted for an accelerated initial public offering (IPO), where the privately owned company being sold is taken straight to market. The money raised then finances the deal. Another broker, Collins Stewart, pioneered the idea last year with Northumbrian Water, sold by French group Suez, then did it again with leisure firm Center Parcs.

"Everyone thought it was a cracking good idea," says Edward Cumming-Bruce, a managing director at corporate finance firm Gleacher Shacklock, of the Northumbrian deal. "It was a big, boring, established business that everyone could get their minds round. You didn't worry about corners being cut because there weren't any to be cut."

The improving stock market conditions are ideal for accelerated IPOs, as is the re- newed appetite for public deals (investors agree to buy shares when the deal is struck, reducing the risk to the seller). AIM, the less-regulated London Stock Exchange platform for smaller firms, is also flexible enough to allow for quick debuts: Northumbrian and Center Parcs trade there and it is Centaur's intended home.

All of which could be bad news for private equity buyers, who have dominated mergers and acquisitions in recent years. "The boom days are over," says Charles Honnywill, a partner at Ernst & Young. "Private equity firms are having to work their portfolios, weeding out the bad and holding on to the good for longer than they may have planned.

"There's no doubt that the private equity houses that we do business with have been unnerved by the Collins Stewart approach."

While markets stagnated, private equity firms were busy raising considerable funds. That cash is still out there: 3i said last week it planned to invest some £1bn in buyouts and small companies over the next year alone. Most private equity firms buy either for growth or value. The first approach, typically associated with bigger houses such as Apax or Cinven, involves buying inexpensively and growing businesses before getting out. The value-driven houses acquire at the lowest possible price, sit on the asset and then flog it for maximum profit.

All this takes time, and accelerated IPOs are blowing these approaches out of the water. With Centaur, for example, insiders were amazed that Numis had beaten trade buyers like Emap, United Business Media and Incisive Media, as well as private equity house HG Capital. But a guaranteed float allows for a bigger offer.

Yet while Mr Honnywill concedes that accelerated IPOs are an interesting concept, he adds: "If it was such a slam-dunk good idea, there would have been many more. This is not the end of private equity as we know it."

To carry off an accelerated IPO, you also need to pick your company carefully. Northumbrian and Center Parcs generate cash, allowing scope for guaranteed dividend income should the share price slide. But Centaur is not as clear-cut: publishing has been hit by the advertising slump, and while conditions will improve, no one agrees on when that's going to happen.

There are other concerns. "The danger is that it becomes trendy," says Mr Cumming-Bruce. "The risk is either that it is done in a rush, so due diligence isn't carried out properly, or there's something smelling under a rock that no one's noticed."

Although Numis is not commenting, there is speculation that the IPO is not as accelerated as it might be, with a rumoured float date of Easter. And while the finance will be raised through public markets, the timing means the deal is starting to look remarkably similar to just a good old-fashioned IPO.