TPG-Led Australian Buyout Revival May Stall as Sellers Balk

TPG-Led Australian Buyout Revival May Stall as Sellers Balk
Healthscope headquarters stand in Melbourne. Photographer: Luis Enrique Ascui/Bloomberg

A recovery in Australian buyouts may be curtailed as private-equity firms with as much as A$8 billion ($6.9 billion) of cash to spend grapple with reluctant sellers and scarce credit.

“Although it’s a good time to buy, people aren’t choosing to sell,” Katherine Woodthorpe, 53, chief executive officer of the Australian Private Equity & Venture Capital Association Ltd., said in a June 15 interview in Sydney. “You have to have both those stars in alignment.”

Stock valuations in Australia have fallen this year even in an economic recovery, as investors fret over Europe’s debt crisis. Blackstone Group LP, TPG Capital and Carlyle Group last month bid A$1.8 billion for Healthscope Ltd., attempting the country’s biggest buyout in two years, according to people with knowledge of the matter.

That bid may have been the high point of the revival in private-equity takeovers in Australia, said Woodthorpe, whose group represents about 60 foreign and local firms. Some companies, emboldened by improved economic prospects, are resisting overtures from the buyout industry and banks remain reluctant to finance large deals, she said.

“The vendors are still not as anxious to sell as you might have thought,” Woodthorpe said. “People are looking at pricing and saying: ‘I don’t necessarily need to sell, so I don’t know that I want to sell at these prices.’”

Her organization, known as Avcal, estimates Australian firms like Archer Capital and CHAMP Private Equity have A$5 billion to A$6 billion to deploy between them, while overseas funds have about A$2 billion to spend on local assets.

Hoard of Cash

That’s still less than the A$11.1 billion buyout offer for Qantas Airways Ltd. in 2007, near the end of the era of cheap credit that preceded the global financial crisis. Shareholders of Australia’s largest carrier rejected the bid.

Deprived of financing during the crisis, private-equity firms are returning as economies recover. Buyout companies worldwide plan to invest a record $507 billion in cash raised before the collapse, triple the comparable figure in December 2001, according to London-based researcher Preqin Ltd.

Carlyle Group, the world’s second-largest private-equity firm, said in May it had $33.5 billion waiting to be invested at the end of 2009. David Rubenstein, co-founder of the Washington- based firm, said June 4 at a Boston conference that the worst was probably over for the industry.

Competition Begins

Private equity-led takeovers announced in Australia reached $323.5 million this year excluding the offer for Healthscope, Australia’s second-biggest hospital owner, according to Bloomberg data. That compares with $7.56 million in the same period last year. New York-based Blackstone, Carlyle, and Dallas, Texas-based TPG haven’t made public their bid. Healthscope yesterday declined to comment.

“A lot of private equity funds have a large amount of capital still to be deployed,” said Andrew Stuart, chief executive officer of BKK Partners Pty, a Sydney-based corporate advisory firm. “We’re just about to see competition beginning for the deployment of that capital.”

With banks reluctant to finance multibillion-dollar deals, buyout firms in Australia will probably focus on targets worth A$500 million or less, said Woodthorpe at Sydney-based Avcal.

Banks are unwilling to extend more than A$1 billion for a leveraged buyout even when lending in groups, and the ceiling is more likely to be closer to A$750 million, said Woodthorpe. Credit can take months to obtain, compared with weeks before the financial crisis, she said.

More Equity

Nineteen banks are financing the A$1.82 billion offer by Blackstone, TPG and Carlyle for Healthscope, the Australian Financial Review reported June 4. A rival A$1.84 billion bid, which Healthscope disclosed without naming the suitor, was made by Kohlberg Kravis Roberts & Co. and CVC Asia Pacific, the newspaper said.

Buyout firms will find it tougher to outbid corporate acquirers as they need to finance a larger part of deals with equity than before the crisis, said Bryan Zekulich, Sydney-based private equity managing partner at Ernst & Young LLP.

“That does limit the ability to pay significantly higher prices,” he said. “If you are a corporate buyer and have synergies available, than arguably you should be able to outbid the private equity house that’s just trying to leverage.”

Debt accounted for as much as 70 percent of the largest buyouts in Australia before the financial crisis, according to Avcal. Now, firms have to stump up half the price in equity, the organization estimates.

Shareholders are pressing boards for more detail on private equity approaches, said Zekulich. The wariness stems partly from deals including the failed buyout of Qantas three years ago, when shareholders rejected a board-endorsed bid from a group that included Macquarie Group Ltd. and TPG, he said.

“Boards and shareholders are still a little bit uncomfortable giving too much access to private equity players,” Zekulich said. “There’s a slight change in underlying shareholder sentiment.”

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