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Private equity feeds on bite-sized deals
NEW YORK/LONDON |
NEW YORK/LONDON (Reuters) - A small spate of mid-sized deals has pushed private equity-backed activity up 42 percent so far this year, but there is skepticism the mega-buyouts that characterized the latest boom will return.
The industry courted the headlines with high-profile deals such as the buyouts of energy group TXU and chemist chain Alliance Boots, which stretched into the tens of billions of dollars from 2005 through to 2007.
Many in the industry now view those deals as the exception rather than the norm and are happy to return to lower-profile deals in the low-to-mid single digit billions.
"It's a bridge too far," said David Roux, co-founder of U.S. private equity fund Silver Lake earlier in June, when asked if there could be a $15 billion buyout in the technology sector.
"It stretches the debt capacity and stretches the equity capacity and it's an unnecessary risk at a time when there are plenty of other good things to do," said Roux, who was speaking at the Super Return conference in Boston.
Private equity deal flow so far in 2011 has risen about 42 percent from a year ago, according to Thomson Reuters data.
Deal volume in the first and second quarter of 2011 totaled $113 billion, up from $80 billion in the first half of 2010. However, volume dropped from the $148 billion recorded in the latter half of 2010.
"Part of the issue is that strategics are back and -- up until the last couple of weeks -- equity markets were reasonably robust, so valuations from a sponsor perspective were hard to justify," said Mark Stephanz, vice chairman of Global Financial Sponsors at Bank of America Merrill Lynch (BAC.N).
Among recent deals were KKR & Co LP's (KKR.N) $2.38 billion buyout of Pfizer Inc's (PFE.N) Capsugel unit and the 2.1 billion euro ($3 billion) buyout of French engineering group Spie.
Private equity firms have been finding themselves outbid by cash-rich strategics -- meaning buyers competing in the same sector as the target.
Corporate buyers, who were hoarding cash throughout the crisis, have returned to the market, providing stiff competition for private equity firms that were mainly competing among themselves for deals last year.
"Strategics are generally beating private equity firms in auctions unless there is no logical trade buyer," said Larry Slaughter, head of EMEA corporate clients at JPMorgan Chase & Co (JPM.N) in London.
Dental implants and medical devices business Astra Tech, being spun out of drugs giant AstraZeneca Plc (AZN.L), is the latest in a long line of deals going to strategic buyers.
The appeal of large deals is also waning for investors.
"Bankers seem ready to lend as much as $10 billion to $15 billion for high quality deals," Antoine Drean, chairman of Triago, a company that helps private equity firms raise capital, said via email. "But with large leveraged buyouts very much out of favor among limited partners, anything larger than this looks pretty unlikely in 2011."
CHINK OF LIGHT
There are, however, some attractive deals private equity firms are winning, such as the roadside rescue business RAC, which Carlyle Group CYL.UL struck a 1 billion pounds ($1.6 billion) deal to buy on Thursday.
Still, some in the industry remain optimistic that mega-deals will return. Some 26 percent of people polled at the Super Return conference said large deals would return soon.
"If the debt markets remain strong, I think we may see some $10 billion-plus LBOs again," said Ehren Stenzler, who took over as co-head of U.S. M&A at UBS earlier this month.
"Sponsors are at least thinking about transactions of that size, which for a very long time they didn't."
Private equity-related deal flow currently makes up nearly 10 percent of overall M&A -- higher than the 3 percent in early 2009, but far below the 24 percent hit during the peak of the most recent private equity boom in 2006.
Jacques Brand, co-head of global investment banking coverage and advisory at Deutsche Bank AG (DBKGn.DE) is optimistic the pace of LBO activity will increase.
"We expect financial sponsors to play a more important role in M&A," said Brand. "Financing terms have become more attractive -- it is possible to raise $10 billion-$12 billion for an LBO."
Brand thinks equity checks in deals, which have been in the $1 billion size and could go to $3 billion to $4 billion.
(Additional reporting by Soyoung Kim in New York; editing by Andre Grenon)
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