Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Leveraged buyout firm sells a company on the stock market, another buys it back. It's been done before, but rarely attempted with the unseemly haste seen at Danish payments group Nets A/S.

Shares Slide
Nets stock has failed to keep pace with the wider Danish benchmark
Source: Bloomberg

Advent International and Bain Capital first sold Nets shares to the public in September for 150 Danish kroner apiece. The stock fell rapidly amid worries over emerging competition, before bottoming in March at nearly 30 percent below the issue price. The shares were languishing at 129.50 kroner last week before Bloomberg News revealed that buyout firm Hellman & Friedman LLC and others were considering making offers.

The public markets have a problem with Nets. The IPO process failed to establish its durable stock-market value. The listing evidently pulled in some hot money that sold at the first sign of trouble. Perhaps private equity is now seeing value where stock market investors do not.

A rapid retreat back to private ownership risks damaging the reputations of all involved. A cheap take-out so soon after a loss-making IPO would simply reinforce the impression that public market investors always get a bad deal with private equity. The temptation for any bidder would be to offer the IPO price and no more.

Net Gain
Nets' private-equity backers still comfortably lead its top five investors
Source: Bloomberg

Is there a face-saving solution? A takeover could at least deliver Nets shareholders the same return they would have had owning Danish stocks. Add a 30 percent takeover premium to Nets's undisturbed value and a deal would cost 168 kroner per share. Had the company tracked the OMX Copenhagen 20 index, the stock would be trading at about 162 kroner.

World of Pain
Since their September debut, Nets shares have struggled to keep up with peer Worldpay
Source: Bloomberg

A bid at 168 kroner a share would value the company at about 41 billion kroner ($6.2 billion) including assumed net debt, or almost 15 times forward Ebitda. That's a big mouthful for a private equity firm, bigger even than Bain and Cinven's recent failed bid for German drugmaker Stada Arzneimittel AG.

Big Mouthful
Nets would be the biggest purchase of a European company by a private equity firm this year
Source: Bloomberg
Note: Bain and Cinven's Stada offer failed to win the support of enough shareholders

A private equity buyer would need to pile leverage back onto Nets to get a decent return. After using money raised in its IPO to reduce its borrowings, Nets has pared net debt to just 2.4 times this year's estimated Ebitda. Payment processing is reasonably predictable so, under private ownership, the company might just be able to sustain net debt of nearly six times Ebitda, or $2.6 billion, leaving the buyer to fund an equity check of $3.6 billion.

A deal might just stack up. Imagine Nets's Ebitda increases 8 percent annually over five years to 4.1 billion kroner ($627 million). If the new owner can find a buyer willing to pay the same multiple it bought in at, the company would fetch $9.1 billion. Deduct the debt, and the equity would have grown to $6.5 billion -- almost twice the original money invested and a double-digit internal rate of return.

It's still a bit a of a stretch. But given the history and the likelihood Nets will attract interest from a trade buyer, no private equity bidder can expect an easy ride.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Chris Hughes in London at

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