Two French deals to test private equity waters

PARIS Wed Jun 30, 2010 7:48am EDT

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PARIS (Reuters) - After two lean years, investors will closely watch the sale of two French firms to see if they will be snapped up in direct deals rather than going to auction, waking up a private equity M&A market that has slumbered.

Frozen food company Picard Surgeles, majority owned by BC Partners BCPRT.UL, and health clinic operator Medi-Partenaires, partly owned by LBO France, both went on the block in the spring.

Competition for these companies, worth more than of 1 billion euros each, is likely to be keen because many funds, are sitting on cash while they fall behind on investment and performance targets.

Appetite is so strong that despite their size, the two companies up for sale could be bought by funds before they have debt financing in place.

The risk is that some funds may rush to buy before performing adequate due diligence. Some private equity players warn a mini-bubble in attractive sectors could be forming.

"There is relative imbalance in the market. There is a lot of cash but few opportunities." said Xavier Marin, President of Paris-based private equity fund Fondations Capital.

"With this pressure to put cash to work some of the larger funds are being very aggressive."

Picard has a network of stores selling frozen food and competes with general retailers such as France's Carrefour (CARR.PA). Medi-Partenaires competes with Blackstone (BX.N)-owned Groupe Vitalia and Generale de Sante (GDSF.PA).

GOOD OLD BAD DAYS

Over the last two years, private equity has hunkered down and waited for the global economic crisis pass, and few firms sold or bought companies.

But now many firms are coming to the end of their five-year fund cycles. They need to make investments or risk the ire of investors who expected their money to be put to good use.

Some funds, including BC Partners, have succeeded in negotiating extensions of the investment periods for certain funds but those that have not will have to spend their cash.

This has caused a series of pre-emptive bids across Europe.

PAI Partners bought France's Cerba Labs in early June before securing financing. Apax Partners acquired medical courier Marken directly, pre-empting an auction process, as did Cinven CINV.UL in its acquisition of European lab business Sebia.

But the market recovery is slow and tentative, and targets outside healthcare, considered recession-proof, remain few and far between.

The sale of Picard and Medi-Partenaires in a strong auction or pre-emptive bid before the end of the summer would signal a return of market confidence, say market watchers.

The question that remains is whether private equity firms will be induced to put assets in sectors more vulnerable to consumer confidence, like retail, up for sale.

Many are unwilling to sell unless they get good prices.

"The funds (PE) need to show high returns. They had some tough years and they are banking on some very good exits," said Jean-Lou Rihon a partner at Silverfleet Capital Partners a private equity firm in Paris.

The pressure to do deals has created a buzz around companies like Picard, which may have garnered little interest before the recession. As a steady business with few growth prospects outside France it is better suited as a dividend yield play than a value game.

"Visibility is more important at the moment than growth," said Marin.

However, with the private equity M&A market fragile at the moment, a failure to sell the companies could send investors back into their bunkers, said one investment banker heading the branch of an international group in Paris.

"There is pressure to invest, but no one is going to accept 15 or 20 times EBITDA (earnings before interest, taxes, depreciation and amortization)," said a banker. "No one can make money off that."

(Additional reporting by Julien Ponthus and Quentin Webb; Editing by Karen Foster)

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