Analysis: Private equity swoop on listed European companies face increasing execution risks

Strong declines in the value of the euro and the pound, combined with the largest trading discounts for European equities against global peers since March 2009, have led to an increase in interest in acquisitions from wealthy buyout companies.

Private equity-led bids for listed companies in Europe have hit a record $ 73 billion in the first six months of this year to date, more than double the volumes of $ 35 billion in the same period last year and account for 37% of all private. share acquisitions in the region according to data from Dealogic.

This is in contrast to a sharp slowdown in overall M&A activity worldwide. But as acquisitions and their shareholders increasingly go against cheap acquisitions, which they believe will not reflect the fair value of their underlying companies in 2022, the outlook for acquisitions in the second half of the year looks less promising.

GRAPHICS: Take-private take-off

The bonanza in the first half of the year was spearheaded by a takeover bid of € 58 billion (USD 61.38 billion) from the Benetton family and the US buyout fund Blackstone for the Italian infrastructure group Atlantia.

Dealmakers say, however, that the vast majority of take-private initiatives are not reflected in the official data, as many private equity attempts to buy listed companies have gone undetected, with boardrooms rejecting takeover attempts before there is even a concrete offer.

“In theory, it’s the right time to look at take-privates as valuations fall. But the execution risk is high, especially in cases where the largest shareholder owns less than 10%,” says Chris Mogge, partner in European buyout funds. BC Partners.

Other recent private equity acquisitions include a bid of £ 1.6 billion ($ 1.97 billion) from a consortium of Astorg Asset Management and Epiris on Euromoney, which values ​​the FTSE 250 listed financial issuer at a premium of 34%, after that four previous offers had been rejected by the board.

Energy producer ContourGlobal, UK waste management specialist Biffa and bus and rail operator FirstGroup have also attracted the attention of private equity in recent weeks, with the latter rejecting the takeover method.

Trevor Green, head of equities in the UK at Aviva Investors, said his team intensified contacts with business leaders to counter low takeover bids, where unwanted private equity approaches became more likely due to exchange rate volatility.

The war in Europe, rising energy prices and concerns about stagflation have hit the euro and the British pound hard, with the former falling around 7% and the latter 10% against the US dollar this year.

“We know that these types of currency movements encourage activity, and when there is room for an agreement, shareholders will rightly push for higher premiums to reflect that,” Green said.

MODERATE EXPENDITURE

Global private equity activity has declined after a record year of 2021, which was hit by fierce inflation, fears of recession and rising capital costs. Total volumes fell 19% in the first half to $ 674 billion, according to data from Dealogic.

GRAPHICS: Global Dealmaking Q2 2022 https://graphics.reuters.com/GLOBALQ2-REVIEW/dwpkrmjlnvm/Q2DEALS1.1.gif

Across the board, including private equity trading, fell 25.5% in the second quarter of this year from a year earlier to $ 1 trillion, according to data from Dealogic.

Buyout funds have been instrumental in boosting global merger and acquisition activity this year, generating $ 405 billion worth of transactions in the second quarter.

But as valuation conflicts rise, concerns about rising debt costs have kept companies from entering into agreements on their preferred listed targets in recent months.

Private equity firms including KKR, EQT and CVC Capital Partners halted their attempts to take control of German listed laboratory supplier Stratec in May due to price differences, three sources said. Stratec, which has a market value of 1.1 billion euros, has the Leistner family as the largest shareholder with a 40.5% stake.

EQT, KKR and CVC declined to comment. Stratec did not immediately respond to a request for comment.

The risk of heavily indebted acquisitions has increased as financing has become more expensive, leaving some buyers struggling to reconcile the number of deals, the sources said.

Meanwhile, the piles of money that private equity firms have raised to invest continue to grow, putting pressure on partners to consider higher risk agreements structured with more expensive debt.

“There is a risk premium on debt, leading to higher contract costs,” said Marcus Brennecke, global co-head of private equity at EQT.

The average return on high-yield bonds – typically used to finance leverage buyouts – has risen from 2.815% at the beginning of the year to 6.77% according to the ICE BofA index, and rising capital costs have pushed debt issuance sharply . delayed.

As a result, private equity firms have increasingly turned to more expensive private loan funds to finance their deals, four sources said.

But as stock prices continue to fall, the gap between premium buyers is willing to offer and sellers’ price expectations for many, and it could take up to a year to narrow, two bankers told Reuters.

In the UK, where a quarter of all European take-private deals have been closed this year, according to data from Dealogic, the average premium paid was 40%, in line with last year, according to data from Peel Hunt.

“Getting these deals across the line is harder than it seems. The real question will be how much leverage (buyers can secure),” a senior European banker with several top private equity clients told Reuters.

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