Private equity struggles to make Spanish bull case

Mon Jun 30, 2014 7:58am EDT

* Leveraged buyouts in Spain last year half of 2007 level

* Recent deals have focused on assets outside Spain

* Economic challenges, high company debts hamper deals

By Freya Berry

LONDON, June 30 (Reuters) - In Spain, an uncertain economic outlook and high levels of company debt mean a trickle of private equity deals are unlikely to turn into a flood just yet.

Having emerged from a long and deep recession, Spain has been hailed by some investors as a land of opportunity, with its main stock index surging more than 30 percent in the past year, in part in anticipation of deals.

"The current hype is huge - everyone wants to get a deal," said Alex Wagenberg, managing director of Carlyle Europe Partners in Spain.

The optimism, however, has largely failed to translate into transactions. Leveraged buyout activity in Spain totalled 2.8 billion euros ($3.8 billion) in 2013, according to Thomson Reuters data, half that of the 5.6 billion euros in 2007.

And of the deals that have taken place, their focus on assets outside Spain is noticeable. KKR, which opened an office in Madrid earlier in the year, bought a 417 million-euro stake in Acciona's renewable energy arm last week - but the portfolio only included assets outside Spain.

Meanwhile Cinven, which is considering opening an office in Spain, earlier this month bought fibre network firm GNFT from Gas Natural, which is mainly focused around Central America.

At 510 million euros, the deal is Spain's biggest private equity buyout of the year so far - a far cry from 2007, when Carlyle spent 1.5 billion euros on Applus.

Part of the problem is Spain's economic recovery remains in its infancy, and fragile. While gross domestic product (GDP) has risen for three straight quarters, around 25 percent of the workforce is still without a job, and the government deficit is not expected to fall back below the European Union's recommended ceiling of 3 percent of GDP until 2016.

High levels of company debt also make it difficult for private equity firms to pursue their traditional tactic of financing deals with borrowings.

The ratio of Spanish corporate debt to GDP rose to 131 percent in 2013 and the European Central Bank said the burden of servicing those debts was the highest in western Europe.

The governor of the Bank of Spain warned earlier this month that soaring asset valuations in the country were failing to take account of the market risks involved, and some private equity firms appear to agree.

"We haven't really invested recently in Spain, although we have looked at many opportunities," said Francisco Menjibar, principal for Spain at Apax, which focuses on large buyout deals.

"There is a lot of competition and a lot of work to be done before you can say that Spain is completely out of the crisis."

GETTING FLEXIBLE

The scarcity of companies suitable for leveraged buyouts has led some private equity firms to look at alternative ways to buy into Spain's potential recovery.

"The real economy is one of the most levered around, and that's an opportunity for us in bringing equity into a deal," said Carlyle's Wagenberg. The firm's European buyout fund has invested over 1 billion euros of equity in the region since 2007.

Fellow private equity house KKR is working with Spanish banks on the refinancing of Grupo Alfonso Gallardo (GAG), resulting in a 500 million-euro loan reduction for the group in return for control of the business's cement and paper subsidiaries. In 2012, GAG had over 1.5 billion euros of debt.

This flexible approach has also attracted newcomers ABAC Capital, founded this year by three ex-Apax employees to provide capital to cash-strapped Spanish firms.

"We saw a once-in-a-lifetime opportunity to invest in Spain," said Oriol Pinya, founding partner and chief executive.

"You have very good businesses that have suffered. And today, they are very over-levered and they have the wrong balance sheet structure or ownership structure."

Spanish banks have recently embarked on a drive to lend to small companies as they emerge from a prolonged property market slump, but overall bank credit in the country is still falling, pushing some borrowers to look for alternatives.

Private equity firms such as Blackstone and Cerberus Capital Management have also been buying up soured real estate loans shed by banks, and bidding on portfolios of housing as they seek out bargains.

However, international funds point out that they cannot address Spanish companies' problems on their own, and that a lasting recovery will only come when banks step up lending and businesses get their own finances in order.

"What we have seen is the only ones who have contributed are the international investors, and that is very bad news," said Jesus Olmos, head of EU infrastructure and Spain at KKR.

"What we would like to see is some contribution from the banks and the corporates."

($1 = 0.7359 Euros) (Editing by Mark Potter)