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Refusing to meddle

Listed French private equity firm Eurazeo is keeping a close eye on its portfolio companies while resisting the temptation to micro-manage. Andy Thomson met with executive board chairman Patrick Sayer, who is confident he can ride the economic storm – and maybe even give a boost to his firm's ailing share price

Patrick Sayer, a board member of French football club Paris St Germain (PSG), spent the previous night watching his team draw 0-0 in a UEFA Cup match away to Manchester City of the English Premiership. Even though they failed to find the net, the result was nonetheless indicative of PSG's progress following a period of struggle. After nearly being relegated last season amid violent protests from fans, in the current campaign they sit proudly near the summit of the French league.

In hi s “day job” as chairman of the executive board at Paris-based private equity firm Eurazeo, Sayer is this morning seated in the offices of his firm's PR advisers in London – and reflecting on the challenges facing the industry. If a PSGstyle turnaround in fortunes can ultimately be accomplished, it is clear that Sayer thinks a lot of pain will be suffered first. “We've moved into recession pretty fast, and this has affected a number of private equity-backed deals out there,” he says.

Sayer points out that the claims made in support of paying eye-watering multiples for businesses around the 2005 to 2007 period will now come under scrutiny. “All these businesses have strong management, barriers to entry, solid cash flows. Now they're facing the acid test.”

Reclining in his chair, Sayer strikes a relaxed pose while at the same time conveying his opinions forcefully. For example, he asserts: “Because debt was so cheap, people were getting a lot of reward for little risk and awareness of risk was lost. Easy money is badly spent.”

CANDID LETTERS
Such strident opinions will probably come as no surprise to those familiar with Sayer's candid letters to his firm's shareholders. In these, he seems happy to reflect on Eurazeo's own challenges in the face of the financial crisis – arguably this level of transparency owes a lot to the firm's stock market listing.

Reflecting on the Eurazeo portfolio in the latest edition (December 2008) he asks: “Is everything perfect? Of course not. Some [of our] investments are more affected by the crisis than others.”

One of the “affected” firms identified in the letter is Accor, the French catering firm in which Eurazeo first invested in 2005 through Colyzeo, a partnership with Los Angeles-based real estate investor Colony Capital (later increasing its stake in May 2008). The letter points out that Accor's share price was “close to [Eurazeo's] entry price” prior to the collapse of Lehman Brothers, but had since lost a third of its value. The fall prompted Eurazeo “to protect our investment by injecting €200 million as collateral”. The letter claimed that the company had shown “enormous resilience” and that management had quickly implemented cost-cutting measures.

Also receiving a mention in the letter was Las Vegas casino operator Station Casinos, another joint investment with Colony Capital. The investment “will no doubt have to be partially written down” but “remains, in the long term, protected by the value of its exceptional real estate assets”, the letter noted.

In conversation about the portfolio, however, Sayer refers not to these businesses but to Paris-based car rental firm Europcar and French electrical components distributor Rexel as “most exposed to the recession”. However, he adds: “Even if an individual business's performance is going down, as long as the long-term trend in the sector is up then the impact will be less.”

Investment companies being valued at a discount to net asset value assumes that we should liquidate ourselves tomorrow, conduct a fire sale of the assets and dismiss the team. It makes no sense

A recent report in London's Financial Times referred to a “storm” striking the car rental market, due to a combination of declining leisure and business travel, intensifying price competition and a drop in used-car values. However, Sayer argues that there is a trend in Europe toward far greater use of car hire – and various recent reports have pointed to steady growth in the industry in the years ahead.

The electrical component market, meanwhile, has seen a drop in demand from its end users, including the new housing market. But, due to such growth areas as energy-saving initiatives and intelligent energy, Sayer believes the industry will see long-term growth of between four to five percent annually.

LONG-TERM DEBT
Overall, Sayer is bullish about the long-term prospects of Eurazeo's portfolio. He points out that “the debt in our portfolio is long term, we have no immediate refinancing needs” ( the firm's port folio companies have debt maturities ranging from 2011 to 2017). Further, he adds that Eurazeo is debt-free at the corporate level, meaning that it can “fully concentrate on its portfolio companies”.

This focus, however, does not mean that Sayer is ready to join the chorus of industry professionals identifying now as the time to staff up with operational experts and get closely involved with day-to-day activities. “We want to control businesses but not through micromanagement,” he says. “We can provide guidance and help with strategic and other key decisions.”

Eurazeo has been doing that under Sayer's guidance since 2002, when he joined the firm as chairman of the executive board. He had previously been a banker for 20 years as a senior partner at Lazard Freres et Cie in Paris and a managing director of Lazard Freres & Co in New York. From 1989 to 1993 he served on the board of Fonds Partnenaires, which then managed the largest private equity fund in continental Europe.

Sayer will be seeking to put that experience to good effect as the changed climate for private equity investing – not least, an almost complete lack of leverage – puts a premium on innovative thinking and the development of new strategic approaches. “We need to find new ways to do business,” concedes Sayer. “In our charter, we're not described as an LBO company. We're 130 years old.” [See box on following page for Eurazeo's complex history].

This is a point that Sayer is keen to make because he believes that being viewed in some quarters as an investment group which has a reliance on leveraged buyouts has assisted a dramatic slide in Eurazeo's share price. “Debt will return at some point but until then we'll do things such as development capital. We're still aiming for yield of around twice the cost of capital, and that means we should be valued at a premium to net asset value rather than at a discount.”

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Debt will return at some point but until then we'll do things such as development capital

n fact, Eurazeo has seen its shares decline from a peak of €118.0 each on 30 April 2007 to €34.1 on 7 January 2009. The last time they were as low as this was in the early months of 1998. While Eurazeo is far from the only listed private equity firm or fund trading at a discount to net asset value, it is nonetheless a notion that Sayer finds hard to swallow. “Investment companies being valued at a discount to net asset value assumes that we should liquidate ourselves tomorrow, conduct a fire sale of the assets and dismiss the team,” he argues. “It makes no sense.”

As if to rub salt into the wound, Eurazeo suffered the ignominy of a 19 percent one-day fall in its share price on 16 September. “We usually trade 0.3 percent of our total share capital in a day. We had 2 percent on the market in an hour,” says Sayer.

The firm quickly issued a statement expressing its belief that the episode was “likely to have been the result of a financial institution being forced to unwind a lending position guaranteed by Eurazeo shares, to which Lehman [Brothers] was the counterparty”. The firm also asked financial regulator L'Autorité des Marchés Financiers to undertake an investigation into the matter, which is ongoing.

EURAZEO: A HISTORY

1881: Establishment of Gaz et Eaux, a French gas and
water distributor
1974: Legal entity Parges becomes Eurafrance on
acquisition of CMI Sovac, holding company of French
consumer business credit company Sovac
1983-94: Eurafrance takes stakes in Gaz et Eaux (45%),
Lazard Partners and a number of investment funds
1990-98: Gaz et Eaux makes a series of acquisitions
and inroads into capital investment, often through
leveraged buyouts or group restructurings
1999: Gaz et Eaux is renamed Azeo
2001: Eurafrance merges with Azeo, in which it has
been a shareholder since 1985, to form Eurazeo.
Bruno Roger becomes chairman of the board
2002: Eurazeo creates supervisory board and executive
board. Patrick Sayer becomes president of the executive
board and Bruno Roger chairman of the superviso-
ry board
2003: Lazard chairman Michel David-Weill becomes
chairman of the supervisory board
2004: Eurazeo merges with Lazard holding company
Rue Imperiale
2005: All Eurazeo interests in Lazard are sold for €610
million as Lazard goes public. Eurazeo sells its entire
stake in IRR Capital, an investment company held since
1997, for €308 million
2006: Eurazeo acquires a 20% equity interest in Banca
Leonardo for €93 million and creates Euraleo, a 50/50
joint venture between Eurazeo and Banca Leonardo to
carry out private equity transactions in Italy
2007: Eurazeo sells a portfolio of 28 funds in which it
had interests as a limited partner
Source: www.eurazeo.com