Cinven, KKR Find European Sweet Spot as Debt Worries Wane

Cinven to KKR Find European Sweet Spot as Debt Worries Wane
A logo for the French cable-TV provider Numericable SAS is displayed on the window of a store in Toulouse, France. Photographer: Balint Porneczi/Bloomberg

French cable provider Numericable SAS and British theme park operator Merlin Entertainments Plc had buyers rushing in the moment they started their initial public offerings. They also have higher debt than the average traded company in Europe.

Private equity-owned Merlin and Numericable rose about 10 percent and 15 percent respectively on their first day of trading on Nov. 8. Their success paves the way for firms including Terra Firma Capital Partners Ltd. and KKR & Co. to test European markets where the amount IPOs raised has about doubled compared with the same period in 2012, according to data compiled by Bloomberg.

“Investors have a higher risk appetite now, and that’s helping IPOs get done,” Harry Hampson, head of a JPMorgan Chase & Co. team advising private-equity firms in Europe, said in an interview. Volumes of private equity-backed offerings next year may rival what they were in the highs of 2007 as more owners look to exit, he said.

After the IPOs, Numericable and Merlin had net debt to earnings before interest, taxes, debt and amortization ratios of about four times and three times respectively, compared with a typical ratio of two times for companies on the Stoxx Europe 600 Index, according to data compiled by Bloomberg.

IPO Candidates

Guy Hands’s Terra Firma began an IPO of U.K. wind-power generator Infinis Plc last month and KKR-owned French flooring maker Tarkett SA filed to sell as much as 540 million euros ($722 million) in shares on the NYSE Euronext in Paris. The IPO will value Tarkett at as much as 2.17 billion euros, Chief Financial Officer Fabrice Barthelemy said on a call today.

Lenta LLC, a Russian hypermarket chain controlled by TPG Capital, and Cinven Ltd.-owned Gondola Group Ltd. are among companies that are considering selling stakes in the coming months, people with knowledge of the matter told Bloomberg News. ISS A/S, a Copenhagen-based provider of contract-cleaning staff owned by Goldman Sachs Group Inc.’s leveraged-buyout unit, and Swedish private-equity firm EQT Partners AB, may also go public in 2014.

Many private equity-backed IPOs this year were of companies that had attempted to come to market earlier, said Richard Brown, a partner at Latham & Watkins LLP in London. Next year will also see smaller issuers that haven’t tried to go public, he said in an interview.

Strong Demand

“We’ve seen higher debt levels in IPO candidates compared with the last few years because many are from private-equity houses and that’s how they are structured,” said Maria Pinelli, global vice chairwoman of strategic growth markets at Ernst & Young LLP.

Merlin, owned by Blackstone Group LP, CVC Capital Partners Ltd. and Lego Group owner Kirkbi A/S, raised 957 million pounds ($1.5 billion) in its London IPO. Numericable, whose owners include Carlyle Group LP, Cinven and Altice Finco SA raised 652 million euros in its Paris IPO, the largest in France in four years. Both firms had enough demand for all the shares they offered on the first day of their sales, two people with knowledge of the matter said.

“What stands out compared to any other offer this year is that from 2009 Merlin began to report like a public company, giving annual reports and trading statements,” Thomas Zimmerhaeckel, a principal at Blackstone, said in an interview.

The fact that investors showed such strong demand for Numericable’s stock with its capital structure reflects that it is “appropriately levered,” Peter Catterall, a partner at Cinven, said in an interview.

Economic Crisis

“Companies have come through the economic crisis and are growing again so the question of debt is less urgent than it was earlier,” said Greg Bennett, the head of capital markets for Europe and the Americas at Fidelity Investment Services Ltd.

An analysis of 144 highly leveraged companies rated for the first time from 2010 showed they borrowed based on forecasts that proved “consistently too optimistic” on growth and cutting debt levels, Moody’s Investors Service said in October. “The underperformance is particularly worrying given the current low interest rates and indicates the potential for increased credit stresses as interest rates rise,” it said.

In August, Partnership Assurance Group Plc, owned by Cinven, fell the most since its June IPO after the Redhill, England-based annuity provider said its main market may not meet its 2013 growth target. The stock is up about 6 percent from its sale price, compared with average IPO gains of 21 percent in Europe this year, according to data compiled by Bloomberg.

Debt Markets

“The fundamental story has not changed around Partnership -- there is still strong growth in the annuity market,” Cinven’s Catterall said.

Private equity-backed deals raised 38 percent of global IPO proceeds in the first 10 months of this year, compared with 20 percent in 2012, data from Ernst & Young show.

Buoyant debt markets are also helping buyout firms looking to sell stakes. Western European companies’ borrowing through leveraged loans in the first eight months of the year exceeded the amount raised in all of 2012, data compiled by Bloomberg show.

Private-equity owners and investment banks managing IPOs are aware their appeal may not last forever and are trying to get as many out the door as quickly as possible. They are also starting processes earlier, speaking to investors 18 to 24 months before the sales to ensure they are well acquainted with new companies.

“IPOs are a bit feast or famine,” said JPMorgan’s Hampson. “Either deals are subscribed and then everyone wants to jump in or investors take their time and then the market avoids them.”

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