Now on Sale: Corporate Europe
European financiers have always favored Paris for shopping trips. But right now they're more interested in cheap media assets than haute couture. Jean-René Fourtou, the new chief executive of floundering conglomerate Vivendi Universal, is holding one of the richest closeout sales of all time. On the block is Vivendi's publishing unit, which includes venerable Boston bookseller Houghton Mifflin Co. and France's cherished Larousse dictionary series. The likely takeaway price: $3 billion to $4 billion, at least a 30% discount on what Vivendi might have collected just a year ago.
Who will buy? Not the other big media companies; they're cash-starved and struggling themselves. No, swooping in with buckets of money are the big American and European private-equity firms, those wily and patient investors that show up amid every corporate crisis. Deploying billions raised from pension funds and the superrich, they're looking to buy companies on the cheap, fix them up, and resell them after a few years, reaping annual returns of 20% or more. And this year, Europe is their No. 1 destination.
While much of the financial industry in Europe is moribund, big buyout firms such as Kohlberg Kravis Roberts, Thomas H. Lee Partners, and Apax Partners are working overtime. They have raised some $50 billion for European shopping sprees, Morgan Stanley estimates. And now, with stock markets plunging and corporate distress spreading, private-equity pros are getting choice opportunities to spend that money. So far this year, Europe has taken the lead in the global buyout industry with $40 billion in acquisitions exceeding $75 million, compared with $33 billion in the U.S., according to Morgan Stanley. Thirteen of the 17 largest deals worldwide this year have been in Europe. They include the region's biggest private-equity transaction ever: the $3.6 billion purchase of French equipment-maker Legrand by KKR and family investment group Wendel Investissement from Schneider Electric; Schneider bought Legrand for nearly $6 billion just two years ago. By yearend, the value of large European private-equity acquisitions is likely to total close to the $60 billion record set in 2000, double the $31 billion of 2001. And the firms' $50 billion war chest, which could be stretched to $150 billion or more through borrowing, is open at a time when many corporations are struggling to raise cash. "More than ever, private equity is a viable alternative to the banks and public markets," says Ronald Cohen, chairman of Apax, a global firm based in London.
An illustration of how private-equity firms take advantage of corporate turmoil was the recent purchase of Kwik-Fit Holdings PLC, a Britain-based chain of auto-repair shops, by CVC Capital Partners, a London-based buyout fund. In 1999, Ford Motor Co. CEO Jacques A. Nasser paid a rich $1.6 billion for Kwik-Fit as part of his plan for Ford to move down the food chain into the car-service business. But Kwik-Fit didn't fit with the back-to-basics tack of William C. Ford Jr., who replaced Nasser last year. So Ford was willing to give away Kwik-Fit for a mere $500 million, including $200 million in financing. CVC got a better price after accounting issues surfaced and the interest of other firms chilled. Ford will retain a 19% stake. Michael Smith, CVC's chairman, says he plans to package the company with related acquisitions, expand it in Europe, and eventually take it public.
These days, Europe's flock of buyout vultures are circling a broad landscape of reeling companies. There's ABB, which recently sold its financial-services units to GE Capital for $2.3 billion in cash and may put an electrical-building-systems business on the block for around $800 million. Another limping giant, France Télécom, has already sold broadcasting units to a consortium headed by London buyout firm Charterhouse Development Capital for $1.9 billion. It now wants to unload its 23% stake in European satellite giant Eutelsat. Deutsche Telekom and BT Group PLC are also eager to sell their Eutelsat holdings, adding up to a $3.5 billion to $4 billion package.
It's not only companies with creditors' guns to their heads that are selling businesses. Continental European companies are finally buying into the notion that conglomerates with many disparate businesses don't work very well. Among the corporations selling superfluous units: TotalFinaElf, which is expected to try to market its SigmaKalon paints business for around $1 billion. Siemens is shedding businesses unrelated to its main lines in telecoms, utility equipment, and medical devices. It recently sold several of these units to New York-based KKR for $1.7 billion.
Of course, the moves made by Europe's private-equity traders are not always brilliant. Apax, one of the most experienced players, recently wrote off a roughly $180 million investment in Bundesdruckerei, the German banknote printer. U.S. buyout firm Clayton, Dubilier & Rice had another German deal, for aircraft-maker Fairchild Dornier, go into insolvency. And even in a down market, not every private-equity deal is a steal. Indeed, the more private-equity groups crowd around to feed on distressed properties, the more prices go up. "I don't feel that overall, values are compelling," says Ned Gilhuly, the KKR managing director overseeing European investments. "Markets are still high by historical benchmarks."
Financing is also tricky. New high-yield bonds are not easy to sell, but banks are plugging the gap with low-rated bank debt and so-called mezzanine debt, a combination of loans and warrants priced to yield nearly 20%. The typical buyout is about 30% equity, 10% mezzanine, and 60% bank debt, says David Yeoman, head of leveraged-finance syndication at the Royal Bank of Scotland--a major arranger of such financing. Indeed, RBS, eight other banks, and Credit Suisse First Boston are underwriting $2 billion in credit for the Legrand deal. "Europe is seeing its largest flow of jumbo deals ever, and they are going down quite well," Yeoman says.
Perhaps the biggest problem for the buyout experts these days is getting out of an investment. Leveraged-buyout firms like to sell their purchases after five to seven years of restructuring, either to an industry buyer or through an initial public offering. Both routes are largely blocked at the moment. That is leading the firms to sell their companies to other buyout groups. "If I was an investor, I would start to worry how much value they are adding when they are buying from each other," says a London dealmaker. Don't tell that to Europe's stressed-out companies: They just want the buyout firms to keep shopping.
By Stanley Reed in London and Carol Matlack in Paris, with David Fairlamb in Frankfurt and Joann Muller in Detroit