Public-to-privates crucial to industry’s success

In the week it emerged that UK retailer Sainsbury’s is the latest high-profile public company being targeted by private equity, new research shows that a record number of take-private deals were the biggest single source of the industry’s growth in the last 12 months.

Public-to-private deals were the biggest driver behind the surge in buyout activity in 2006, according to new research.

The figures suggest that private equity firms are more adept at completing complicated take-private deals than ever before, despite a few high-profile failures and despite the ongoing debate about whether these deals provide good value for shareholders.

The report, by ratings agency Standard & Poor’s, said that $128 billion (€99 billion) of take-private deals were completed in 2006, more than twice as much as the $50 billion figure for 2006. In total, take-privates accounted for 55 percent of global buyout volume – up from 38 percent last year. Almost half of all buyout-related loans were spent on public-to-private deals – 49 percent, compared to 37 percent in 2005.

Public-to-private deals have come under the spotlight recently, after some high-profile deals have foundered over price. Listed group 3i’s bid for Countrywide, an estate agency chain, was recently rejected by shareholders after a group of activist investors publicly argued that the offer price was too low. A consortium of US investors has been facing similar problems with its bid for media group Clear Channel.

Listed UK retailer Sainsbury’s is the latest big company to be targeted by private equity, after it emerged that CVC Capital Partners, Kohlberg Kravis Roberts and the Blackstone Group are considering a bid. The news has prompted more debate about whether take-private deals really offer a good deal to shareholders.

One potential worry for public company shareholders lies in the average equity contribution to take-private deals, which is lower than for leveraged buyouts as a whole. The average contribution for take-private deals was 27.6 percent, compared to the overall average of 31.1 percent, and this proportion dropped steadily in every quarter of last year.

However, the figures do seem to show that buyout firms are having more success in taking listed companies private than ever before, despite these concerns.

Once again, the figures reiterate how buyout firms are taking advantage of the current liquidity in the leveraged credit market. Over the course of the year, sponsors borrowed $122 billion to finance buyouts, almost twice as much as in the previous year. Although the average equity contribution remained broadly in line with 2005, debt multiples were on the increase, particularly for large deals. 41 percent of all deals worth over $50 million had a pro forma debt multiple of more than 6 times – the highest proportion since 1997.

This was partly a reflection of the increasing price of assets. On average, buyout firms were paying an 8.6 times multiple of earnings for target companies – an all-time high.

As well as chasing bigger targets, firms were also quicker to realise cash from their portfolio. Dividend payments were also on the rise – $26 billion, up from $23 billion in 2005.

In total, the report said, the volume of loans to buyout firms shot up to a record $234 billion during the year, up from $145 billion last year. This accounted for just under half of the entire loan market.