BREAKINGVIEWS-Europe's mega-buyouts too big to exit

Wed Nov 2, 2011 10:30am GMT

(Adds Context News)

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Quentin Webb

LONDON, Nov 2 (Reuters Breakingviews) - The jumbo buyout of ISS is proving Too Big To Exit, having now exhausted the three standard routes. The $8 billion Danish cleaning giant couldn’t sell to new private equity firms, nor stock-market investors, nor a listed rival. Things can’t be much easier for Europe’s other mega-buyouts. Deleveraging while waiting for the new issues market to reopen may be the only course.

Multi-billion-euro leveraged buyouts were easy enough during the credit bubble: Europe’s biggest include Alliance Boots, the KKR-owned pharmacist with 20 billion pounds in revenues; Acromas, the company behind the AA and Saga brands; and TDF, the French broadcast-towers business.

But the sheer scale of these firms means years later it’s harder to see how private equity recoups the investment. It’s one thing to buy and expand a $500 million business before resale to a bigger private equity house that wants to grow the business globally. It’s much harder to convince direct rivals they can add value to a $10 billion firm. Size also limits potential industrial buyers. And even if one emerges, risk-averse shareholders may kill the deal, as happened this week with G4S’s bid for ISS.

So the most natural exit for mega-deals is an initial public offering. But Europe’s IPO markets are all but shut. And any reopening will see many issuers vying for investors’ attention. Moreover, former buyouts remain out-of-favour in Britain, and may encounter scepticism in places like Denmark, where a PE-backed jewellery listing bombed.

Of course, buyout firms have time on their hands: most funds run for 10 years, the first five for investing, the second for sell-offs. Outside investors will usually grant extensions, too. And while getting the same exit price after a longer holding hurts annualised “internal rate of return” figures, more important “money multiples” -- the proportional gain on the initial investment -- are unscathed.

Some fiddles might be possible, such as selling a stake to a new investor, as Madame Tussauds-owner Merlin Entertainments did last year. But adding extra debt to pay dividends along the way could be a mistake, since leverage is a big part of the anti-PE case. Better would be to pay down debt and refinance at better terms if possible. And hope that the IPO renaissance is round the corner.

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CONTEXT NEWS

-- British security firm G4S dropped its planned 5.2 billion pound bid for ISS on Nov. 1, saying it was “inappropriate to proceed” after shareholders balked at the deal’s “scale and perceived complexity”.

-- ISS, the Danish cleaning giant, has been owned by EQT, the private-equity firm backed by Sweden’s Wallenberg family, and Goldman Sachs Capital Partners, for six years. It dropped a planned flotation earlier this year, having previously held inconclusive talks on a sale to buyout firm Apax Partners.

-- A spokesman for the owners said that prior to the takeover approach from G4S, ISS had “successfully amended and extended its debt facilities, enabling ISS to continue growing its business organically on a ‘business as usual' basis for several years to come”.

-- Reuters: G4S bid for ISS scuppered by shareholder backlash [ID:nL5E7M10JP]

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(Editing by Chris Hughes and David Evans)

((quentin.webb@thomsonreuters.com)) Keywords: BREAKINGVIEWS PE/

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