American sponsors began to get busy in Europe last year after deal activity was crushed in 2009, with the disclosed value of deals doubling to $17 billion, according to an analysis by Buyouts, a VCJ affiliate publication. This year could see a continued momentum, thanks in part to an expected parade of carve-outs.
That said, deal volume last year represented just a fraction of the peak year, 2007, which saw $113 billion of deals. And the deals that are being done now seem to be considerably smaller. That $17 billion was spread among 147 deals in 2010, while the 2007 tally was based on 219 deals.
The year 2007 saw the biggest deal ever in Europe by an American sponsor, the $21.5 billion takeover of the British retailer Alliance Boots plc by an investor group led by Kohlberg Kravis Roberts & Co. New York-based KKR also did a $4.1 billion deal that year for the French directory publisher PagesJaunes Groupe SA and, in conjunction with Permira, a $3.3 billion deal for the German satellite broadcaster ProSiebenSat.1 Media AG. The Blackstone Group acquired Tussauds Group Ltd for nearly $2 billion in 2007.
“We did see the signs of recovery last year, but we did not see a recovery to the dramatic levels of the go-go years of 2006 and 2007,” said Bryan McLaughlin, a partner in the transaction services unit of accounting firm PricewaterhouseCoopers LLP.
To conduct the analysis, Buyouts compiled five years of deal records from the Thomson One database, focusing on American financial sponsors and European targets and comprising nearly 850 individual transactions. The span from 2006 to 2010 took in the peak years of the boom as well as the bust that followed.
By far, the most popular way for U.S. buyout firms to invest in Europe has been through groups. At least 116 of the transactions in our dataset, 14% of the total, were identified as investor groups in the Thomson One report, and that did not include ventures that were identified individually, such as AB Acquisitions Ltd., formed to do the Alliance Boots deal, or Valcon Acquisition BV—formed by Blackstone, The Carlyle Group, KKR, Thomas H Lee & Co., Hellman & Friedman LLC, and Alpinvest Partners NV—for the $11.3 billion deal for Dutch publisher VNU NV in 2006. Deals with disclosed values that were conducted by “investor groups” accounted for $56.1 billion dollars over the past five years.
It makes sense for American firms to team up frequently with local partners to do deals abroad, said Saul Nathan, head of the financial sponsors group for Europe, Middle East and Africa at investment bank Morgan Stanley. “The ability to construct a going-private transaction in the U.S. is a well trodden path,” a single legal jurisdiction with established rules of the road and a deep pool of target candidates.
Even within the 17-nation euro zone, which share a common currency, “there are differences in the way takeover laws operate in different countries,” Nathan said, making LBOs more difficult in some markets, and cultural differences may make boards more circumspect about encouraging such activity.
For buyout shops operating independently, The Carlyle Group was the most active firm in our study, doing 49 deals, including those with disclosed value of $4.8 billion. Apollo Management only did 15 deals, but those with disclosed value came to more than $4.9 billion. The other most active mega-firm, KKR, did 37 deals, including those with disclosed value of $24.1 billion.
Perhaps the surprise of the study involved Advent International Corp., which did 45 deals, including those with disclosed value of $5.1 billion. Advent, with $10 billion of capital under management, is a fraction of the size of the mega-firms (Apollo, by contrast, manages $41.6 billion), yet its deals with with disclosed value topped them all.
Carve-outs To Come
The United Kingdom was the most popular home for U.S. sponsors to find European targets, accounting for $96 billion of volume or 36.2 percent of the total, followed by Germany and the Netherlands.
Media and entertainment industries were the most popular targets for sponsors, accounting for $57.8 billion of volume or 21.8 percent of the total, followed by real estate investments, retailers and industrial companies.
Looking forward, the market watchers said 2011 is shaping up to be a potentially active season. Sponsors are flush with cash—$425 billion of dry powder, according to Thomson Reuters—and interest rates are low.
“The U.S. market is always a little bit earlier to recover,” said Nathan of Morgan Stanley. “The appetite for risk tends to lead from the U.S. and follow in Europe.”
Cultural factors also figure into the secondary market for transactions, where one sponsor exits a holding to another sponsor, he said. Europeans have given only grudging acceptance of that practice, and then only in the last year, Nathan said.
“If it’s just a competition about who’s got the lowest cost of capital and we’re buying somebody from a knowledgeable seller, that doesn’t advocate differentiated performance,” he said. “If you’re a larger cap fund firm doing bigger deals, it’s OK to take on a portfolio company from a smaller or a midcap firm, if that business has grown from the time of the original buyout that it comes onto the radar screen of the larger firm, and if you can convince yourself that even at that larger scale, the company can provide the kind of returns that private equity aspires to.”
But more primary deals may begin to come to market in the year ahead, in the form of carveouts, said McLaughlin of PwC. A harbinger of that might be one of 2010’s largest deals, the $3.1 billion deal for the British card company RBS Worldpay by Advent International and Bain Capital as the government-owned Royal Bank of Scotland Group plc exited the card business.
And in such deals, Europeans may have an edge, McLaughlin said, because of their greater use of preparation he described as “vendor due diligence,” where the seller, rather than the buyer, does the initial evaluation of the business unit. Such a report can eliminate the duplication of due diligence work by multiple suitors, who want answers to many of the same questions. “When private equity comes in to look, they’ve already got a report from a company like ours,” he said, and so can focus on issues that differentiate their approach.
Despite the current availability of equity and debt, no one is predicting a return to the frothy days of 2007. Said Nathan of Morgan Stanley: “I think today people are much, much more disciplined. They won’t compete where they don’t believe they have genuine competitive advantage—a strategic angle, a management angle or a model that’s more ambitious.”