Private equity firms are making inroads into Germany's corporate debt markets

Capital-starved German Mittelstand businesses do not have much to cheer about at present. But the launch in October of Deutsche Kredit Börse, a new debt exchange in Munich, looks like a welcome exception.

The new bourse, which will allow institutions to trade corporate loans made to small-to medium-sized German companies, is backed by Lehman Brothers. The global investment bank's private equity arm owns a 30 percent stake in the venture. The remaining 70 percent of the business is held by the management board and private individuals.

Lehman Brothers declined to comment on the transaction, beyond a spokesperson confirming the size of its stake and stating that the firm was committed to “supporting the growth of capital market trading in Europe”.

The exchange has been launched in response to the long-standing paucity of capital available to Mittelstand companies. These enterprises, often described as the backbone of the German economy, have been suffering from a general dearth of credit for years after their traditional lenders, responding to shareholder as well as regulatory pressures, were forced to change their terms of doing business years.

Analysts estimate the total size of the potential market in Mittelstand loans made to companies with revenues between €1 million and €500 million to be around €60 billion ($77 billion). If Deutsche Kredit Börse proves a success, it will create some of the liquidity that the corporates are craving.

Approximately 50 banks have shown an interest in using the new exchange according to a report from Dow Jones. Trading on the bourse is expected to begin before the end of the year.

Meanwhile corporate loans to mid-sized companies are not the only type of German debt attracting private equity attention. The country possesses what is thought to be the second-largest non-performing loan (NPL) market in the world behind China, and at least one private equity firm has quietly been muscling in on the action.

Texas-headquartered Lone Star has completed eight NPL acquisitions in the last 14 months for a total of over €6 billion, culminating in its purchase of a €1.2 billion distressed debt portfolio from Dresdner Bank in October. In September, the firm also acquired a €3.6 billion portfolio of property-related debt from German mortgage company Hypo Real Estate.

At the same time that mainstream private equity in Germany is showing pleasing signs of growth, the more exotic debt-related strategies are clearly finding opportunities as well.

3i scores heavily on westminster sale

3i Group has agreed to sell UK private nursing home operator Westminster Healthcare to trade buyer Barchester Healthcare in a £525 million (€757 million; $947 million) cash transaction. Barchester, which is owned by Irish horseracing magnates JP McManus and John Magnier, prevailed in an auction in which a number of private equity bidders also participated. Financial sponsors Charterhouse Development Capital and Allianz Capital Partners, which recently acquired healthcare provider Four Seasons from Alchemy Partners, also bid for Westminster. 3i quadrupled its original equity outlay on the deal, achieving an 80 percent internal rate of return, with proceeds from the sale amounting to £225 million. 3i bought Westminster in early 2002 in a £270 million acquisition from financial investors Goldman Sachs Whitehall Funds and Welsh Carson Anderson & Stowe.

Dallas-headquartered buyout firm Hicks, Muse, Tate & Furst has sold its remaining 20.4 percent stake in listed UK food retailer Premier Foods for £110m (€159 million; $198 million). The holding vehicle for HMTF's investment sold 49,934,781 shares at 220 pence per share via an accelerated book-build led by Merrill Lynch International and JP Morgan Chase & Co. The latest move completes HMTF's exit from the deal, which began when Premier Foods joined the London list in July 2004 at 215 pence per share, valuing the company at £527 million. At that time, HMTF sold £232 million worth of shares. Following this it had a 30 percent stake, before reducing it further to just over 20 percent when an over-allotment option was exercised. Birmingham-based Premier Foods was one of two companies spun out of Hillsdown Holdings, the UK listed food group, after HMTF acquired Hillsdown in 1999 in an £822 million LBO.

UK cinema chain Cine-UK has been acquired by US LBO house Blackstone Group via a management buyout. Terms of the deal were not disclosed, but the consideration is believed to be around £120 million (€174 million; $214 million). The business was acquired from a private equity consortium including Botts & Co, JP Morgan Partners and RIT Capital Partners. In September, Blackstone was outbid for the Odeon cinema chain, which was sold to Terra Firma Capital Partners for approximately £400 million. At the same time, Terra Firma also acquired the UK and European network of cinema operator UCI for around £180 million. Set up in 1995, Cine- UK owns and operates Cineworld, a chain of 35 cinemas with 361 screens. Blackstone was advised on its acquisition of Cine-UK by UK law firm Olswang and Simpson Thacher of the US. The selling consortium was advised by Lovells.

Swiss speciality chemicals group Clariant has sold AZ Electronic Materials (AZ), a German supplier of electronic materials to the semiconductor and flat panel display sectors to The Carlyle Group in a deal worth €338 million ($418 million). Coinciding with the buyout, Carlyle has appointed a new senior management team and board at AZ. Thomas von Krannichfeldt will join in November 2004 after spending 30 years in senior industrial positions at Praxair, Union Carbide and Mobil Oil. Ken Greatbatch has been appointed chief financial officer at the business, having formerly been chief financial officer of BTP and Vantico. Joining von Krannichfeldt and Greatbatch on the board of AZ are three Carlyle Group executives: Robert Easton, Zeina Mansour and Gregor Bohm. Carlyle has invested in three other companies in the semiconductor and electronic materials sector: Jazz Semiconductor, Ness and CPU Technology.

VNU, the Dutch information and media company, has agreed to sell its World Directories business to private equity firms Apax Partners and Cinven for €2.075 billion ($2.5 billion). Apax and Cinven will acquire equal stakes in the business from the Apax Europe V fund and the third Cinven fund respectively, which both raised €4.4 billion in total capital. The amount of equity and debt invested and the size of the respective stakes being acquired was not disclosed. World Directories, which employs 2,200 staff, publishes Yellow Pages directories and telephone books in print, online and mobile formats and will be headed up by Andrew Day, who joins from Sensis Pty Ltd. In the year to 31 December 2003, the business generated €492 million of revenues and €228 million of EBITDA. Apax's past successes in the directories sector include a joint investment with Hicks, Muse, Tate & Furst in the £2.1 billion buyout of Yell from British Telecom. Yell was floated in July 2003, and when Apax fully exited the business in January 2004, it generated a 2.5 times return on its original investment.

Five months after opening an office in Madrid, the pan-European buyout firm has won the race for 600 Spanish retail stores sold by Dutch supermarket group Ahold. The deal, which is subject to regulatory clearance, is valued at approximately €685 million ($855 million). It is the first investment for Permira in the Spanish market since it opened an office in Madrid in April this year and was described by the firm as “the largest commitment ever made by a private equity firm in Spain”. Permira beat off competition from Apax Partners and CVC Capital Partners among others to secure the stores that generated net sales of €2 billion in 2003. Carlos Mallo, the firm's senior executive in Spain, led the deal. A partner and managing director, Mallo is in charge of the firm's dedicated Spanish team that also includes Francesco De Mojana and Jose Mugica. Elsewhere Permira, along with fellow shareholders, sold German dental distributor Müller & Weygandt to UK private equity firm PPM Ventures for €110 million.

SECONDARY BUYOUTS DOMINATEEight out of the ten largest private equity backed UK buyouts in Q3 2004 were secondaries

Target Buyer Seller Value
Four Seasons Healthcare Group Allianz Capital Partners Alchemy 775
ABB 524
Odeon Cinema / UCI Terra Firma WestLB, Entertainment group/Vivendi 500
Safety-Kleen Europe JP Morgan Partners Electra Partners 280
Maplin Electronics Montagu Private Equity Graphite Capital 244
Pets at Home Bridgepoint Capital 3i (minority stake) 230
Paramount Hotels Shore Capital, Dawnay Day Alchemy 215
Southern Cross Healthcare Blackstone Group West Private Equity 167
Survitec Montagu Private Equity Alchemy 146
Hillarys Blinds Change Capital Partners Close Brothers PE 115