Wanted: European Buyout Targets
Alfred Nobel, the inventor of dynamite and founder of the Nobel Prize, would have been proud. When Dynamit Nobel, the corporate descendant of the company he founded in 1865, went on the market recently, more than 40 buyers expressed interest. After a bidding war, a group led by private equity house Kohlberg Kravis Roberts & Co. and Credit Suisse First Boston Private Equity triumphed with a $2.7 billion offer for the company, which is now based in Troisdorf, Germany.
The hope among global private equity investors is that Dynamit Nobel will help blast loose more buyout deals. Many in the private equity business are convinced that the climate for buyouts in Germany, as well as the rest of Europe, is better than it has been in more than two years. Dealmaking slumped amid falling stock prices and a dearth of buyers after the collapse of the dot-com-fueled bubble. But the art of the deal is showing some signs of a comeback. In Germany, private equity deals totaled $3.7 billion in the first quarter of 2004, up more than $1 billion from the previous quarter. But that's still down from $4.1 billion a year earlier. Europe-wide, the numbers are similarly mixed. Buyouts fell to $15.2 billion in the first quarter of 2004, down from $21.1 billion the previous quarter and $20.1 billion a year earlier, says market watcher Initiative Europe. Britain, where buyout specialists have a longer track record, accounted for as much activity as the rest of Europe combined. Even so, some in the industry expect a surge. "We see a significant uptick in the deal flow," says Christopher L. Peisch, managing partner of ECM Equity Capital Management, a Frankfurt private equity firm that specializes in mid-cap buyouts.
Why the optimism now? For one thing, private equity firms in Germany alone raised some $7.6 billion last year, up from $4.4 billion in 2002, according to the German Venture Capital Assn. While that's down from a peak of $12.3 billion in 2001, the number of targets is expected to increase dramatically as big conglomerates such as MG Technologies, Dynamit Nobel's parent, bolster their balance sheets by shedding subsidiaries not related to their core business. "The deal flow has gotten much stronger in the last six to nine months," says Max Burger-Calderon, a Munich-based executive with Apax Partners, which recently took part in the $700 million buyout of SULO Group, a German waste management company.
CATALYSTS? But while private equity buyouts seem to be picking up across Europe, the total value is still far below the peak of $41.6 billion reached in 2000, according to the European Private Equity and Venture Capital Association (EVCA). Yet the number of private equity firms has continued to rise during the slump, almost doubling since 1998, to 1,600 Europewide, says the EVCA. Their great hope is that Europe's thousands of family-owned companies will come on the market as their founders age and die. So far that hasn't happened as fast as private equity players hoped. "All the data would tell you there's huge demand, but it will come slowly," says Ann-Kristin Achleitner, a professor at the Technical University of Munich.
Private equity investors are also known, of course, as vulture investors, feeding on the carrion of weak companies to make a quick profit. In recent years, however, they have been recognized as catalysts for needed restructuring. An example: German pay-TV provider Premiere, which emerged from bankruptcy after private equity house Permira agreed to invest $260 million last year in return for a majority stake in the former Kirch Group unit. Although Premiere was forced to lay off 1,000 people from its staff of 2,500, the rest of the jobs were saved. Now, after renegotiating overpriced programming deals and boosting subscribers, Premiere is poised to turn a profit after reducing its operating loss in 2003 to $12.5 million from $404 million in 2002. Sales last year rose 17% to $1.15 billion. "The kind of deal that really transforms the marketplace is a win for everybody," says Jane Crawford, managing director for Germany, Austria, and Switzerland at private equity firm 3i.
Private equity deals usually take at least six months to complete, so the key question is how much is in the works. Word in the business is that the pipeline is filling up. An improving euro-zone economy is boosting confidence among private equity investors. Although fraught with risk, the average return for buyout funds in Europe still averages more than 13% a year, according to a recent study. Dealmaking is also getting a boost as rising asset prices give company owners more incentive to sell.
Market players see plenty of potential, particularly in the less crowded market for companies with sales of $600 million or less. The market may have reached its sweet spot, with prices high enough to encourage sellers, but still low enough to promise a good return. "The mood is starting to change," says Wilken von Hodenberg, CEO of Frankfurt private equity company Deutsche Beteiligungs. He sees the German market for midsize deals doubling in five years, to some $5 billion. Looks as if buying out is coming back in.
By Jack Ewing in Frankfurt