BUSINESSWEEK ONLINE : OCTOBER 16, 2000 ISSUE
SPECIAL REPORT Storming Fortress Europe American LBO firms invade the Continent A new Battle of the Atlantic is raging in Europe: a fight for dominance as a wave of leveraged buyouts rolls over the Old Continent. Contingents of veterans from U.S. firms such as Kohlberg Kravis Roberts & Co.; Hicks, Muse, Tate & Furst; and Carlyle Group are using their fat pocketbooks to slug it out with local rivals. All three have set up separate European funds with more than $1 billion in value, while others will invest billions through their American buyout funds. ''In virtually every deal we enter, we are competing with an American,'' says one partner in a European firm. Conditions couldn't be better for the invading army. The launch of the euro, Europe's single currency, at the start of 1999, triggered widespread corporate restructuring. Conglomerates, still common in Europe, are ready to be broken up. Companies are selling noncore subsidiaries as they strive to become more competitive. Private companies are seeking more capital so they can expand in global markets. And lagging share prices for Old Economy companies mean there's an asset fire sale. What's more, a fast-expanding market for junk bonds denominated in euros makes deals easier to finance. ''There is huge potential in Europe still,'' says John Muse, co-founder and chief operating officer of Hicks Muse. ''Over the next five years, there will be a lot of action here.'' WAKE-UP CALL. There is already. Europe's traditionally sleepy LBO business has been jolted out of a long slumber. The capital pouring into European LBOs this year is expected to top last year's $12 billion, itself a 50% jump from 1998. Chase Manhattan Corp. (CMB) figures $40 billion of committed capital is ready to invest in medium to large-size deals. Transactions are getting bigger, too. John D. Burgess, director of BC Partners, a European buyout firm, says when the firm started in 1986, a $50 million buyout was considered a big deal. ''Now, that is tiny,'' he says. Deals in the $500 million to $2 billion range are becoming common. U.S. firms like the sound of that and have clinched several high-profile deals since they started arriving in force in the late 1990s. KKR, for instance, has scooped up two of Europe's biggest deals so far this year. On Sept. 25, it announced a $1.2 billion deal to acquire most of the additives and material-processing businesses of Britain's Laporte PLC. That followed its $1 billion purchase of British mini-conglomerate Wassall PLC, which it split up, merging the lighting business with Austrian company Zumtobel's lighting business and retaining a 30% stake in the enlarged company. Last year, Texas Pacific Group did a complex roll-up of pub and brewery companies in which it says it invested a total of $6 billion. In the early days of the American invasion, some of the home-grown players retreated to the sidelines. These days, though, the likes of BC Partners, Cinven, and Schroder Ventures are beating the U.S. challengers on some deals. Cinven and Investcorp won last year's $2.1 billion deal to buy a specialty-chemical division from Astra Zeneca. And in July, Doughty Hanson & Co. completed the purchase of Ranks Hovis McDougall Group for $1.7 billion, beating out an American contender for the year's second-biggest deal. Has the arrival of the big U.S. spenders simply driven up the price of deals? Locals charged that happened at the start when the invaders stormed in looking for trophy deals. But there are now a lot more deals: 81 over $130 million in 1999, vs. 32 in 1997. ''This increase in supply makes it hard to conclude that increased funds have pushed prices up,'' says Thomas Walker, head of financial-sponsorship coverage in Europe at Chase Manhattan in London. But Europe is an expensive place to do business anyway. For years, the landscape has been littered with richly priced deals, especially for companies put up for sale through auctions--the traditional and highly competitive side of the business where firms compete for the same deal. This top-dollar pricing has encouraged many firms such as TPG to look for their own deals. Carlyle, for one, has pushed hard to become local--setting up four offices on the Continent rather than sending flying squads out of London. Says one Carlyle investor: ''Those with real local presence are more likely to have access to proprietary deals.'' It certainly helped Carlyle to find Riello, a family-owned Italian manufacturer of heating products that it bought for about $540 million earlier this year. Telecoms look like a fertile area to some. One significant American purchase during 2000 was a $760 million deal to buy 81% of Italiana Telecommunicazioni SpA, Telecom Italia's (TI) switching company, by Clayton, Dubilier & Rice and Cisco Systems (CSCO). Some firms have even set up special funds to invest in the sectors. For instance, Blackstone Group has a global $2 billion communications fund, which recently took part in a big cable privatization in Germany. However, traditional Old Economy plays remain a mainstay of the business, both for European players and the American transplants. Corporate orphans--noncore subsidiaries that are sold off--are a steady source of deals. Tax changes in Germany exempting banks from capital-gains taxes on the disposal of industrial holdings could ramp up that business in the future--as could the expected trend toward dismantling conglomerates as businesses focus and streamline their activities. While conglomerates are rare in the U.S., they're still very common in Europe: Hicks Muse figures that they account for about 70% of listed stocks in Germany, vs. 10% in the U.S. AMERICAN WAYS. Who grabs the lion's share of that business may depend on style. Europeans tend to make much of cultural differences that they hope will work in their favor. Americans, say some, tend to be more open and pushy. But, locals will follow American ways if there's money in it. Low stock prices of many old-line companies on European stock markets, for instance, have created a profitable line of business in snatching up public companies and taking them private. Hicks Muse did that last year with its $863 million purchase of British food manufacturer Hillsdown Holding PLC. But local rivals did similar deals of their own, such as Cinven's purchase of British-based United Biscuits Holdings PLC. If local knowledge becomes important, the U.S. firms have a simple answer: Buy it. Advent International Corp., for example, found that steering through the shoals of local business practice and custom on the Continent was ''a black art,'' says managing director William Schmidt. So Advent has hired most of its personnel locally. Now, out of 45 professionals on the payroll in Europe, only five are Americans. Less easy to fix by hiring is another problem that bugs LBO firms: the lack of good entrepreneurs. ''There are huge opportunities in Europe, but the challenge for us is to find the right management teams to back. The problems are both in the level of sophistication and entrepreneurial spirit,'' says one American buyout expert. Even so, there's no sign that the worry is denting enthusiasm for Europe. ''Europe is coming of age,'' says Richard T. Warner, a member of the management committee at Investcorp in London. Certainly, that's what the American invaders are banking on. By Heidi Dawley in London _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Return of the LBO CHART: Largest Buyout Firms CHART: Privileged Investors... TABLE: A Pipeline to Losses? A Buyout Fund for the Internet Age Storming Fortress Europe TABLE: The American Invasion of Europe INTERACT E-Mail to Business Week Online

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