A Red Carpet For Americans

As the pickings in the U.S. get lean, private equity groups have discovered that Europe is the land of opportunity

Wind, Italy's no. 3 telecom group, has always been a poor fit as part of Enel (EN ), the country's electricity giant. So last fall Enel began preparing to spin off Wind in an initial public offering. But these days nothing that's for sale in Europe escapes the roving gaze of the private equity dons. So on Feb. 15, U.S.-based Blackstone Group pounced. And the offer it made took Corporate Europe's breath away.

Blackstone proposes to do a leveraged buyout of Wind that would value it at $16.6 billion. That would make the deal the second largest ever, behind the $25 billion RJR Nabisco (NO ) buyout in 1988. And Blackstone's huge offer -- in which it is expected to put up $2 billion and tap other investors and banks for the rest -- isn't necessarily the only one. Other investors are poring over Wind's books and could make rival bids that sweeten the pot. "Things could accelerate on both sides now," says one executive close to Wind. "These kinds of numbers whet the appetite."

Europe is suddenly the world's playground for private equity. Last year private equity funds invested $156 billion in European companies, up 66% over 2000. More than half of Europe's merger-and-acquisition deals in 2004 were financed by private equity groups. Among the most notable: Clayton, Dubilier & Rice's $4.5 billion buyout of French electrical equipment supplier Rexel and Blackstone's $1.3 billion takeover of Holland's New Skies Satellites. Driving change is Europe's struggle to get more competitive. After years of lagging in corporate restructuring, Old World companies are embracing private equity overhauls to ratchet up growth and earnings -- from small family enterprises to huge chunks of Europe Inc.

Some experts already worry that the huge amounts of fresh capital seeking deals in Europe is likely to bid prices up and sabotage future returns. But most believe Europe has only begun to roll up its sleeves. "The U.S. is about 10 years ahead of Europe in its focus on corporate efficiency," according to Nigel McConnell, managing director of London-based Electra Partners Europe.

Leading private equity groups, in turn, see Europe's still untrampled buyout landscape as a better bet than the saturated U.S. market. Indeed, the recent interest has spurred a fund-raising frenzy, with groups like Blackstone, Warburg Pincus, JPMorgan Chase (JPM ), and Goldman Sachs (GS ) soliciting investments for gargantuan new funds with an eye to placing a big chunk in Europe. Private equity managers say European companies haven't been as ruthless or determined to clean up balance sheets and look for savings. "When you buy a business in Europe, you tend to have more improvement potential," says Johannes Huth, head of Kohlberg, Kravis Roberts & Co.'s European operations.

Blackstone wouldn't comment on its bid for Wind, but it has been a major player on the European dealmaking scene since the mid-1990s. Blackstone set up an office in London in 2000 and last year roughly half its global business was in Europe. It's not alone. All the big U.S. players have piled in, jostling for deals against local funds. Rival KKR set up its London-based operations in 1999 and last year snapped up five companies totalling $9.8 billion, including MTU Aero Engines, Dynamit Nobel, and Royal Vendex. Not to be outdone, the Carlyle Group, which opened its first European outpost in 1997, is about to close a new $2.7 billion Europe fund.


Private equity is accelerating restructuring across the Continent and supporting a nascent shareholder culture at a time when most European stock markets are in an IPO-unfriendly funk and overcautious banks are unwilling to lend to cash-strapped companies. "Ten years ago, German CEOs didn't think private equity could help them," recalls Henry R. Kravis, founder and partner at KKR. Times have changed. Some private equity investors are even testing the waters in Bulgaria, Romania, and Ukraine, where ponderous state-run companies are coming on the auction block.

Money-losing Wind is the perfect example of a company ripe for an overhaul. Founded in 1998 by Enel as part of a misguided diversification, it has languished. Wind now trails powerful rivals Telecom Italia (TI ) and Vodafone Italia with only 19% of Italy's lucrative cell-phone market. But analysts say there is ample opportunity to leverage Wind's ambitious investments in one of Europe's only integrated fixed and wireless telecom networks just as a new market for broadband services takes off.

"Wind can offer a quadruple play -- merging voice, Internet, mobile, and video services" over one network, says Emilio Pucci, director of e-Media Institute, a research house based in Milan and London. By restructuring and offering managers better incentives, Blackstone wants to make Wind a more nimble and profitable player with its next-generation technology.

To whip it into shape for a possible sale, Wind's management slashed costs by $200 million last year. Now the mobile carrier forecasts it will break even in 2005. But the higher the bidding goes, the harder it will be to make Wind's restructuring pay rich dividends. At least one group, Egypt's Orascom Telecom, is rumored to be preparing to top Blackstone's bid in coming days. Some worry the market is overheating. "If you're not disciplined, you can pay more than what's reasonable," says Benoît Colas, a Paris-based managing director of the Carlyle Group.

Once feared and misunderstood as vultures eager to carve up and sell off companies in pieces, private equity groups now find much of Europe rolling out the welcome mat. And no wonder: Many of the first generation of companies to undergo restructuring at the hands of outside investors were not broken up. Far from it. Private equity managers helped companies grow and increase employment. Banking information systems specialist Wincor Nixdorf, which KKR acquired in 1999, ranked No. 8 in German job creation between 2000 and 2005. Likewise, Antwerp-based fund GIMV transformed Gaelan, a small family-owned East German window-frame maker, into a major player in Central Europe in three years, raising sales by 56%, to $160 million, while more than doubling the fund's return. And employment at Gaelan rose from 530 to 760 in the same period. "The impact on European industry is very profound and very healthy," says Benoît Leleux, professor of entrepreneurship and finance at the IMD business school in Lausanne.

How long can the dealmaking boom last? With ever-bigger funds chasing a limited number of deals, the risk is growing that bidding wars will start to undercut future returns, especially at the top end of the market. But for now, the private equity pipeline shows no sign of running dry. And that's good for Europe Inc.

By Gail Edmondson in Frankfurt, with Maureen Kline in Milan and Carol Matlack in Paris

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