Buyout firms face strategic fight for deals

LONDON/NEW YORK Thu Feb 24, 2011 11:29am EST

Related Topics

LONDON/NEW YORK (Reuters) - Private equity firms face mounting competition from deal-hungry strategic buyers with the cash and appetite to outbid them, stealing away some of the companies they have been tracking for some time.

Having spent the last 12 months battling each other to pick up prize assets at auction, buyout firms see strategic buyers with strengthened balance sheets re-entering the fray.

With the benefit of cost savings and revenue synergies, trade buyers should almost always be able to pay more than private equity, bankers say.

But for every cloud, there's a silver lining: trade buyers are trawling private equity portfolios for some deals, and their ranks are swollen with new arrivals from Asia.

"Not only are strategics getting interested in auction processes, in some cases strategics are trying to pre-empt auction processes," said Matt Grinnell, head of financial sponsors in Europe for Barclays Capital (BARC.L).

Diageo (DGE.L) agreed to buy Turkish liquor producer Mey Icki for $2.1 billion, heading off a potential initial public offering or a sale of the TPG-owned business to another party.

Danaher Corp (DHR.N) pipped buyout firms, including a group of TPG TPG.UL and Blackstone (BX.N), for medical diagnostics firm Beckman Coulter BEC.N, when the company sold itself.

One of the private equity teams was only beaten on price by a fraction, one source familiar with the situation said.

And a host of live deals from French dairy group Yoplait to Astra Tech, the dental and medical devices unit of AstraZeneca (AZN.L), see international trade buyers bidding against buyout firms, people familiar with the processes said.

Not only should potential savings allow a trade buyer to pay more. A seller may also feel more comfortable selling to a strategic buyer, who is paying cash and has little need or risk of raising debt, said Martha McGarry, a senior M&A partner at law firm Skadden, Arps, Slate, Meagher & Flom.

SUPER RETURN

The outlook for deals will be one topic to be hotly debated when private equity bosses convene in Berlin next week for SuperReturn International, the industry's largest annual event.

Among those scheduled to speak are Carlyle Group's co-founder David Rubenstein, Apollo Management APOLO.UL co-founder Leon Black and TPG's David Bonderman.

Guy Hands will also put in his first appearance in front of rival houses and investors since his firm Terra Firma TERA.UL lost control of music business EMI to Citigroup (C.N).

Private equity buyouts almost doubled last year to $211 billion, Thomson Reuters data shows, as appetite for deals recovered and firms fought to buy businesses from each other, keeping prices close to pre-credit crisis levels.

But concerns that buyout firms could be frozen out of deals this year will be allayed by the interest many mature private equity investments are attracting from trade buyers.

"Well resourced trade buyers approaching with credible proposals get listened to," said Simon Tilley, head of the European Financial Sponsors Group at DC Advisory Partners. "They don't necessarily sell immediately to that trade buyer, but it could be a catalyst for a process."

Bankers say they are showing European companies to a legion of potential Asian buyers -- Indian industrials groups, Chinese consumer groups and Japanese trading houses among others.

Opaque decision-making processes and an inexperience with auctions and the tactics needed to win businesses make dealing with potential Asian buyers more difficult, bankers say.

Hoever, the rewards are great for private equity sellers, not just in financial terms, but also in the kudos that comes from putting money back in investors' pockets.

"For private equity, selling to a rival firm will not endear them to investors when it comes to the next round of fundraising," said DC Advisory Partners' Tilley.

"Floating assets on overseas stock exchanges or selling to overseas trade buyers, who are prepared to pay a strategic premium, makes you look pretty smart to your investors."

(additional reporting by Nadia Damouni in New York; Editing by David Cowell)

FILED UNDER: