May 14, 2019 / 3:15 PM / 2 months ago

Breakingviews - German $6 bln flop shows private equity’s dilemma

Cars are seen at Spandauer Damm causeway in Berlin, Germany, October 8, 2018. REUTERS/Fabrizio Bensch

LONDON (Reuters Breakingviews) - Hellman & Friedman and Blackstone Group’s failed German bid offers a case study in private equity’s biggest dilemma. Growth assets like Scout24, an online-listings company the pair wanted to buy, have offered some of the best returns in recent years. But frothy markets mean buyout groups risk overpaying to clinch them.

The duo’s 46 euro-per-share offer valued the company known for its ImmobilienScout24 home-sale website at 4.9 billion euros. On Tuesday they revealed that barely two-fifths of shareholders accepted the offer – short of a 50 percent threshold.

Frothy markets are to blame. The offer, agreed with Scout24’s board in February, represented a 27 premium to its undisturbed share price in December – before news reports of private-equity interest. That’s a fairly standard takeover premium. Since then, however, shares in peers Rightmove and Auto Trader have risen by 26 percent, eroding the upside. Including debt, the offer values Scout24 at 5.7 billion euros, or 17.3 times the median Refinitiv forecast for this year’s EBITDA. In February that was a one-tenth discount to peers – defensible given Scout24’s lower margins. Now it’s a 22 percent discount.

The buyout groups could have raised the price, but that would mean eating into returns which were already low: Breakingviews estimates the internal rate of return at just 12 percent. And because the purchase multiple was already high, the bidders couldn’t pile much more debt onto the group. Assuming a five times net debt to 2019 EBITDA multiple, H&F and Blackstone could have loaded 1.6 billion euros of borrowings onto the company. That’s just 29 percent of the acquisition price, including debt. Leveraged buyouts typically use debt for two-thirds, or more of the purchase price.

Scout24’s growth rate, estimated at 17 percent this year by the median Refinitiv forecast, should have made it an appealing asset. Information and technology-sector buyouts grew at 14 percent per year from 2009 to 2018, using PitchBook data – more than any other sector it tracks. Technology deals were the second most lucrative after healthcare from 2009 to 2015, reckons Bain & Company. Yet the episode shows that public investors are often unwilling to part with such assets at prices that make sense for buyers. Private equity managers are sitting on $1.2 trillion of uninvested capital, according to Preqin data. Finding a way to invest that cash is looking increasingly difficult.

Breakingviews

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