Bloomberg News

Buyout Firms Beaten in Takeover Auctions by Cash-Rich Companies

June 07, 2011

June 8 (Bloomberg) -- TPG Capital, the leveraged-buyout firm started by David Bonderman, twice came close to buying companies at auction in the same week. Both times, it lost to a corporation offering to pay more.

The firm bid about 490 million pounds ($806 million) for London-based shoe designer Jimmy Choo Ltd., according to two people with knowledge of the matter. Labelux Group GmbH, the owner of Bally footwear, won the auction on May 22 by paying about 12 percent more and offering a stake to Tamara Mellon, Jimmy Choo’s co-founder, said the people, who declined to be identified because the talks were private. Three days earlier, Tokyo-based Toshiba Corp. acquired Landis+Gyr AG, a Swiss electronic-metering company TPG was also vying to buy, for $2.3 billion, two people with knowledge of the transaction said.

After rebuilding cash reserves, companies are resuming acquisitions and competing against private-equity firms for the same assets. Worldwide, companies with market values of at least $2 billion had cash and near-cash items of $8.6 trillion in the latest reported year, 21 percent more than the previous year, according to data compiled by Bloomberg. Pressure from so-called trade buyers is making it harder for LBO firms to invest and reap returns on the $400 billion of funds they have to spend.

“Corporations are now competing more aggressively with buyout firms,” said Matthew Grinnell, head of a team at Barclays Capital that advises LBO firms. “A lot of the cash on corporate balance sheets is finding its way into acquisitions.”

‘Not Even Worth Competing’

Shareholders aren’t pushing companies to return cash because they would rather see it invested for growth, said Larry Slaughter, head of corporate coverage at JPMorgan Chase & Co. in London. That’s helped fuel the $1 trillion of acquisitions announced by companies worldwide this year, a 22 percent increase on the same period a year earlier, Bloomberg data show.

“We’re beginning to see situations in which corporates are very determined to buy,” said Christian Rochat, a partner at leveraged-buyout firm Clayton Dubilier & Rice LLC. “In some cases, they are so far ahead of the competition that it’s not even worth competing.”

The New York-based firm was beaten by Japan’s Itochu Corp. in March in the auction for Kwik-Fit Group Ltd., the British auto-repair chain sold by Paris-based buyout firm PAI Partners.

LBO firms are struggling to beat prices paid by trade buyers partly because the amount of bank debt they can raise to fund takeovers is limited, said Celine Mechain, a Goldman Sachs Group Inc. banker advising buyout firms in Paris. Typically, LBO firms use loans secured on the targets they acquire to finance more than half of the purchase price, and cash from their own funds for the rest.

Unwilling to Lend

Thermo Fisher Scientific Inc., a U.S. instruments-maker, acquired Swedish laboratories operator Phadia AB in March for 2.5 billion euros ($3.7 billion), about 16 times earnings before interest, taxes, depreciation and amortization. Buyout firms would only be able to raise about 6 to 7 times Ebitda in debt, Mechain said.

“Even for great assets like Phadia, there’s still a limit beyond which banks aren’t willing to lend,” Mechain said. New York-based Goldman Sachs advised Phadia on the sale.

Private-equity firms worldwide reduced the so-called dry powder, or money they have left to spend before their funds expire, to $400 billion in May from a record of almost $500 billion in 2009, according to London research firm Preqin Ltd. It’s still more than the amount that was available in 2006, when buyout firms announced $538 billion of transactions, about five times the value of deals announced in last 12 months, Bloomberg data show.

‘Win Their Hearts’

“Strategic bidders are well aware of the private-equity firms’ firepower, and they’ve learned to adapt by making unexpected, pre-emptive bids to avoid auctions and by offering competitive incentive packages to the managers of the companies they target to win their hearts,” said Mechain.

General Electric Co. purchased French electrical-equipment maker Converteam in March for $3.2 billion after failing to buy it in a previous auction in 2008. This time, it didn’t wait for the company to be formally put up for sale by its owners, Barclays Private Equity Ltd. and LBO France, and made an unexpected bid, people with knowledge of the matter said.

GE also allowed Converteam’s managers, who had acquired a stake through incentive packages offered by its private-equity owners, to keep a holding in the company.

Likewise, Labelux wooed Jimmy Choo’s managers by offering them a share in the shoe designer. Spokesmen for Fort Worth, Texas-based TPG, Labelux, General Electric and Barclays Private Equity declined to comment. A spokeswoman for LBO France wasn’t available for comment.

‘Competition Remains Fierce’

“Corporates coming back coincides with a big overhang of unspent capital that buyout firms need to invest,” said Richard Parsons, a director at Deloitte LLP in charge of advising buyout firms on deals in London. “Competition remains fierce for the best assets with this leading to high multiples being paid.”

While increased competition from companies is making it harder for buyout firms to find bargains, it’s providing a boon for those trying to sell investments. Trade buyers purchased the four largest private-equity-owned companies sold this year, according to data compiled by Bloomberg. They have acquired $84.5 billion of assets from buyout firms in North America and Europe, treble the amount in the same period last year, according to Preqin.

That appetite from trade buyers is reducing the number of “pass-the-parcel” deals, when a company is sold by one private-equity fund to another. Investors in private-equity funds have criticized the deals because it sometimes means they end up owning the same assets through a different fund while paying fees to the selling firm. They also question the value a second or third private-equity owner can add to a company.

Secondary Sales

In Europe, these secondary buyouts account for 15 percent of all asset sales by private-equity firms this year, down from 49 percent in the same period in 2010, according to Preqin. In North America, the figure fell to 15 percent from 26 percent.

“If a buyout firm can combine the best price with selling the asset to a strategic trade buyer, limited partners are likely to look upon them more favorably,” said Mark Pacitti, a partner at Deloitte corporate finance in London.

In all, sales to trade buyers make up 62 percent of total exits in Europe and 53 percent in North America this year, according to Preqin.

Takeda Pharmaceutical Co., a Tokyo-based drugmaker, agreed on May 19 to buy Switzerland’s Nycomed, which makes medication for smokers’ cough, for 6.3 billion euros from a group including Nordic Capital Svenska AB and Credit Suisse Group AG’s LBO unit in the largest sale by private-equity equity firms this year.

Blackstone Group

Blackstone Group LP, the world’s largest private-equity firm, was outbid last month by a group led by Fila Korea Ltd., the owner of the Fila sport apparel brand, for Fortune Brands Inc.’s golf unit. General Mills Inc., the maker of Cheerios cereal, beat Lion Capital LLC and Axa Private Equity to buy a stake in Yoplait SA being sold by PAI Partners.

“With more synergies and a lower cost of capital, strategic buyers will often be able to win a bid over a private- equity company if they really want the asset,” said James Agnew, chairman of U.K. corporate broking at Deutsche Bank AG.

--With assistance from Rachel Layne in Boston. Editors: Steve Bailey, Edward Evans.

To contact the reporters on this story: Anne-Sylvaine Chassany in London at achassany@bloomberg.net; Brett Foley in London at bfoley8@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Jeff St.Onge at jstonge@bloomberg.net.


Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus