Lbo Frenzy On The Continent
In August, Franz Scherer was thinking about working less and spending more time sharpening his bridge game and lowering his 16 golf handicap. Then the 56-year-old executive, who had just finished up a 10-year stint in top executive positions in Germany and France with Rank Xerox Ltd., got a call from a headhunter. So much for semi-retirement. Scherer is now CEO of Sirona, a maker of dental products that Germany's Siemens spun off on Nov. 3 in a leveraged buyout put together by Britain's Schroder Ventures. Laments Scherer: "My golf and bridge are really going to suffer."
Then again, Scherer, who plans to buy into the company, could pile up a tidy nest egg for his real retirement if the Sirona deal pays off by going public in the next five years. And he's hardly the only European exec dreaming of LBO riches. An unprecedented LBO boom is sweeping the Continent. Three deals in the range of $1 billion or more have been done since Jan. 1 (table). Another is planned by yearend, when the Italian telephone company is due to spin off its yellow pages in a projected $2 billion leveraged deal. With the price of deals skyrocketing, the value of LBOs done in the Old World this year will vastly exceed last year's $7.3 billion total for 90 deals, predicts Mike Stevens, head of management buyout services with KPMG Corporate Finance in London.
WINDFALLS. The $900 million March LBO of Geberit, a Swiss toilet-equipment maker, kicked off the European buyout boom. It was the first Continental LBO to approach $1 billion and the first to include a high-yield offering in a Continental currency. If dealmaking continues to escalate as it has since then, European competitiveness may increase dramatically.
That's because the deals are giving European conglomerates a new, profitable way to slim down and shuck off nonessential businesses. They are also giving many managers big windfalls. Take Nutreco Holding, a Netherlands-based LBO that was spun off of British Petroleum Co. in 1994. The producer of fish and animal feed went public in Amsterdam on June 3 and now has a market value of about $575 million. Some 70 managers still own a 10% stake, with about 6%, worth $34 million, held by Nutreco's top 10 executives. With such success stories all around, executives are now increasingly ready to jump when LBO firms call. In September, two top Adidas honchos took the helm of Norwegian sportswear maker Helly Hansen after Bahrain-based Investcorp acquired a 70% stake in the company for $112 million in an LBO.
A major impetus to the LBO wave is the revolution in debt markets as Europe moves to a single currency. Government bond rates across Europe are converging--at under 6% for 10-year debt, for instance--in advance of the January, 1999, monetary union. To earn higher yields, investors are searching for riskier credits. And LBO junk debt, with yields ranging from 9% to 13% on 10-year notes, is just the ticket.
"You can raise any amount of money for the LBO market," says Claes Dahlback, president of Investor, the holding company of Sweden's Wallenberg family, which has a $350 million LBO fund and plans to create a larger one.
Indeed, with institutional investors expecting 25% to 35% annual returns, London-based LBO funds have raised $7 billion in new money since January. The funds generally put up the equity while debt is covered by bonds and bank borrowing. Increasingly, major European insurers, such as Germany's Allianz, and pension funds invest in Continental LBO funds. "This has all happened in the last 12 months--and it's going to get a lot bigger," predicts Alan Jones, Morgan Stanley & Co.'s London-based European leveraged-finance chief.
Morgan Stanley, which has expanded Jones's operation to 20 people from 2 in March, isn't the only U.S. firm eager for a piece of the action. One reason London LBO funds are so hot is that U.S. institutional investors, turned off by sky-high U.S. LBO prices, are pouring money into Europe. CalPERS and other U.S. pension-fund managers are investing more aggressively in European LBO funds. And U.S. LBO firms, including Kohlberg Kravis Roberts, Carlyle Group, and Advent International, are expanding in Europe to take advantage of the opportunity. J.P Morgan, Merrill Lynch, Salomon Brothers, and other U.S. investment banks are also beefing up their European leveraged-finance operations. "The potential here is enormous," says Timothy J. Grell, Merrill Lynch & Co.'s managing director for European leveraged finance.
Europe provides fertile ground for LBOs. That's partly because numerous family-owned companies are looking to sell out as the post-World War II generation ages. Many big European conglomerates are also horribly inefficient. A recent J.P. Morgan & Co. study found that in 10 out of 14 industries, units of German conglomerates earn less than freestanding rivals. The situation isn't much better in other Continental markets. "Most of the big European conglomerates are on the investment bankers' hit lists," says one top London LBO fund manager. Possible targets: Germany's Siemens, Daimler Benz, and Mannesmann, and France's Pechiney, Generale des Eaux, and Saint-Gobain.
LITTLE TURMOIL. European LBOs, however, tend to be softer and gentler than their U.S. counterparts. Cost-cutting is far less extensive because labor laws and public opinion prohibit the wholesale sacking of employees. In the three years since its LBO, Nutreco has actually increased the number of its employees by 200, to 5,600. CEOs at most of the big Continental LBOs being done this year say they are counting on faster growth, not cost-cutting, to boost earnings and pay off debt. "This is a different style of LBO from the the wild ones in the U.S., where the new owners cut the company to pieces and laid off people," says Jean Paul Villot, CEO of French postal equipment maker, Neopost, a recent LBO.
Given the lack of tough cost-cutting and the escalation of prices, skeptics wonder how many of the Continental deals will pay off as expected. A number of firms say they passed over the Sirona deal because the price, rumored to be about $450 million, was too rich. Gordon Bonnyman, who heads London's Charterhouse Development Capital, says that it's now common for Continental LBOs to fetch 16 to 18 times earnings--a lot, given that most of them involve companies in mature, slow-growth industries. Bonnyman contends many LBO funds will have a hard time cashing out deals in two or three years unless European bourses continue to boom. "They're making a huge bet on European stock markets," he says.
Still, no doubt a massive amount of dealmaking is about to occur on the Continent. Its nascent LBO market isn't even as big as Britain's. And Europe's entire leveraged-finance market is still only perhaps 15% of the $110 billion U.S. market. "This is an emerging market that is one day going to rival the one in the U.S.," predicts Cecile Belaman, head of J.P. Morgan's London-based financial sponsors group. That day is probably still a long way off. But as recently as a year ago, such a prediction would have been barely imaginable.