Analysis: Private Equity’s Descent on European Listed Companies Faces Rising Execution Risks

  • Boards and shareholders start protesting lowball deals
  • Pushing for higher premiums worsens debt financing dilemma
  • Valuation gaps between buyer and seller can take a year to close

LONDON, June 28 (Reuters) – European listed companies haven’t been so cheap in more than a decade, but for private equity firms looking to boost their cash, more expensive funding and resistance stronger companies complicate transactions.

Sharp declines in the value of the euro and the pound, coupled with the largest discounts on European equities relative to their global counterparts since March 2009, have fueled an increase in private interest from wealthy buyout firms. cash.

Private equity offerings for listed companies in Europe hit a record $73 billion in the first six months of this year to date, more than double volumes of $35 billion in the same period last year and accounting for 37% of all private equity buyouts in the region, according to Dealogic data.

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This contrasts with a sharp slowdown in overall M&A activity around the world. But as target companies to be privatized and their shareholders increasingly bristle at cheap punts they say don’t reflect the fair value of their underlying businesses in 2022, the prospects for deals in the second semester seem less promising.

Leading the first half was a 58 billion euro ($61.38 billion) takeover bid by the Benetton family and U.S. buyout fund Blackstone (BX.N) for Italian infrastructure group Atlantia (ATL.MI).

Negotiators, however, say the vast majority of privatization moves are not reflected in official data, as many private equity attempts to buy up listed companies have gone unnoticed as boards have rejected privatization approaches. takeover even before the launch of a binding offer.

“In theory, now is a good time to look at equity investments as valuations are falling. But the risk of execution is high, especially in cases where the major shareholder owns less than 10%,” he said. Chris Mogge, Partner at BC European Buyout Fund. The partners.

Other recent private equity deals include a £1.6 billion ($1.97 billion) bid from a consortium of Astorg Asset Management and Epiris for Euromoney (ERM.L) which has valued the FTSE 250-listed financial publisher at a premium of 34% after four previous bids. rejected by its board of directors. Read more

Power generation company ContourGlobal (GLO.L), UK waste management specialist Biffa (BIFF.L) and bus and rail operator FirstGroup (FGP.L), the latter of which rejected the take control, have also captured the attention of private equity in recent weeks. approach. Read more

Trevor Green, head of UK equities at Aviva Investors (AV.L), said his team was stepping up engagement with company executives to thwart lowball deals as unwanted private equity approaches were made more likely to take account due to currency volatility.

War in Europe, soaring energy prices and fears of stagflation have hit the euro and pound hard, with the former falling around 7% and the latter 10% against the US dollar this year .

“We know that this type of currency movement encourages activity, and where there is room for agreement, shareholders will rightly push for higher premiums to reflect that,” Green said.


Globally, private equity activity has slowed after a record year in 2021, hit by runaway inflation, recession fears and the rising cost of capital. Overall volumes fell 19% to $674 billion in the first half of the year, according to Dealogic data.

Deals at all levels, including private equity deals, fell 25.5% in the second quarter of this year from a year earlier to $1 trillion, according to Dealogic data. Read more

Buyout funds have played a major role in sustaining global M&A activity this year, generating deals worth $405 billion in the second quarter.

But as valuation disputes escalate, concerns over rising debt costs have prevented companies from striking deals for their preferred listed targets in recent months.

Private equity firms such as KKR, EQT and CVC Capital Partners in May abandoned bids to take over German lab supplier Stratec (SBSG.DE) over price differences, three sources said. Stratec, which has a market value of 1.1 billion euros, has the Leistner family as its largest shareholder with a 40.5% stake.

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

Risks of highly leveraged corporate takeovers have increased as financing becomes more expensive, leaving some buyers struggling to rack up deal numbers, sources said.

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

“There is a risk premium for debt, which leads to higher transaction costs,” said Marcus Brennecke, global co-head of private equity at EQT (EQT.N).

The average yield on high-yield euro bonds – typically used to fund leveraged buyouts – jumped to 6.77% from 2.815% at the start of the year, according to the ICE BofA index, and the rise in the cost of capital has sharply slowed the issuance of debt. (.MERHE00)

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

But as stock prices continue to fall, the gap between the premium buyers are willing to offer and sellers’ price expectations remains too wide for many and could take up to a year to narrow, said two bankers at Reuters.

In the UK, where Dealogic data shows a quarter of all European privatization deals were done this year, the average premium paid was 40%, in line with last year, Peel data shows. Hunter.

“Getting these deals is harder than it looks. The question is really going to be how much leverage (buyers can get),” a senior European banker with several large private equity clients told Reuters. .

($1 = 0.8141 pounds)

($1 = 0.9450 euros)

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Reporting by Joice Alves, Emma-Victoria Farr, Sinead Cruise, additional reporting by Yoruk Bahceli, editing by Pamela Barbaglia and Susan Fenton

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