Onex CEO Says Lack of Corporate Carve Outs Limiting Takeovers

A dearth of corporate carve outs is limiting the number of potential targets in the leveraged-buyout market for Onex Corp., according to its chief executive officer.

Strategic mergers and acquisitions in North America have been busier over the past two quarters than those led by private equity players, said Gerry Schwartz, CEO of Toronto-based Onex, Canada’s largest private equity firm, which has $21 billion in assets under management.

“Unfortunately, corporate carve-out activity remains pretty slow as many corporate sellers don’t have good near-term alternatives for the cash proceeds,” he said Friday on a conference call. As a result, fewer companies are willing to part with the assets Onex wants to buy, he said.

A carve out occurs when a parent company sells a minority stake in a subsidiary for an initial public offering or a rights offering.

Onex’s long-term goal is to grow the value of its asset base by 15 percent annually on a per-share basis.

As of March 31, it had $5.9 billion of combined capital on the books, or $52.82 a share, up just 4 percent from a year earlier, according to a company statement. That’s also down from $6 billion, or $54.11 a share, as of Dec. 31.

Onex remains prepared to pounce on any investment opportunities that present themselves, with roughly $3.6 billion in committed capital ready to be deployed. The company has been active recently in Europe, acquiring Swiss packaging firm SIG Combibloc Group AG for $4.4 billion and U.K.-based Survitec Group for $680 million acquisition.

That failed to keep pace with Onex’s record $6.1 billion of divestitures in 2014.

Fall Short

Shares of Onex rose 0.9 percent to C$70.41 at 1:36 p.m. in Toronto. The company increased its dividend this week to 6 cents a share, from 5 cents.

Scott Chan, a Toronto-based analyst with Canaccord Genuity, said he expects Onex will fall short of its 15 percent target for the next year or two. Over the last five years, Onex’s asset value per share has only grown 12 percent annually, he said, adding the $2.2 billion in cash on the books will drag on returns until it’s deployed.

While that may be a concern for Onex’s short-term investors, it’s unlikely to faze those used to the company’s investment cycles and who are in for the long haul, he said.

“The big acquisitions that people typically look for have been quiet,” Chan said in an interview. “It’s just a different part of the cycle. Over the past 18 to 24 months they’ve monetized a lot of investments and built up that cash position.”

Schwartz acknowledged Onex’s 2009 investment in Tropicana Las Vegas Casino Hotel Resort fell short of expectations. The firm agreed to sell the property for $360 million in April to Penn National Gaming Inc. Onex’s portion of the sale amounted to $50 million.

A slower-than-expected recovery in Las Vegas tourism after the recession was to blame, he said.

“Gaming revenues and hotel room rates never recovered to the extent that we anticipated,” he said.

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