(For more Reuters DEALTALKS, double click on )
By Byron Kaye
SYDNEY May 19 Pacific Equity Partners hopes to
pull off one of Australia's most profitable private equity exits
in years when it floats cleaning and catering company Spotless
Group with a market value triple what it paid less than two
But with relatively little detail about how Australia's
biggest equity player made what it says is a A$1.9 billion
($1.78 billion) company out of an asset it paid A$723 million
for in August 2012, some investors wonder if the change of
fortunes is too good to be true.
"What has happened in two years, not even that, for private
equity to turn it around, to now be offering just on A$1 billion
for just over half,?" said IG Markets strategist Evan Lucas told
Reuters. "Yes, they've done some cost cutting, but with private
equity you don't really get to see exactly where that's at."
PEP, which declined to comment on the float, plans to sell
51 percent of Spotless in an IPO worth up to A$1 billion, set to
be the biggest Australian listing since November 2010.
At one third the country's average private equity turnaround
time, according to data from Preqin research, Spotless also
ranks among the fastest times for a private equity firm to buy a
company off the stockmarket, restructure it and then list it
PEP's exact return is not known, but assuming it put in 50
percent of equity to buy Spotless - the average for recent
Australian buyouts - the firm could make more than five times
its initial investment, according to Reuters calculations.
Doubling cash paid is considered a success in private
equity. Adding A$1.2 billion to the company's total
capitalisation in 21 months would represent a gross return of
PEP has already pulled cash out of Spotless - it paid itself
a dividend after refinancing the firm's debt in 2013, further
boosting its overall return on the investment.
A successful float would vindicate PEP's role in a bitter
takeover battle for the 68-year-old Melbourne-based firm, which
for five months resisted its offers claiming it could revive its
sagging profits itself.
More broadly, a strong float from Spotless would signal a
recovery in the Australian IPO market which, despite an increase
in activity, remains cautious following years of erratic share
price movements and several high-profile flops.
Investors still have bitter memories of the TPG Capital
Management -backed IPO of department store operator Myer
Holdings Ltd in 2009. The stock has never traded above
the A$4.10 per share offer price and has lost nearly half its
value since listing.
PEP has had its share of troubles with IPOs. In 2011, it
floated KFC and Sizzler restaurant owner Collins Foods Ltd in a
A$202 million IPO, close to what it had paid six years earlier.
Three months later Collins gave a profit warning. Its shares are
yet to trade over their issue price.
IPO issuance in Australia since the beginning of the year
has more than doubled to $1.2 billion over the same period in
2013, according to Thomson Reuters data. Companies raised $6.04
billion from new listings in all of 2013, the best year since
Spotless CEO Bruce Dixon defended the speed of restructure,
saying it was well in train by the time PEP took control.
"I don't think everyone appreciates it but ... it wasn't a
plan developed right at the takeover," Dixon told Reuters via
telephone from London, his only media interview during meetings
with institutional investors ahead of a bookbuild starting on
"We had a head start of 18 months (prior) to the deal."
The Spotless restructuring involved selling an
underperforming plastic coat-hanger firm and its international
business, as well as slashing management overheads by half, all
by early 2013, he added.
The prospectus shows evidence of cost cutting with PEP
forecasting Spotless's net profit to double in the 2014
financial year and grow by another 28 percent in 2015, despite
Dixon said future growth would come from A$1.5 billion worth
of possible new business rather than more cost cutting.
Simon Mawhinney, a senior portfolio manager at Australian
fund manager Allan Gray, said his firm typically sidestepped
private equity-backed IPOs.
"We don't have a competitive advantage in assessing which
are the good ones which have sustainable earnings, and which are
the bad ones which essentially have been dressed up for IPO,
costs ripped out, (with an) unsustainable cost base," he said.
($1 = 1.0682 Australian Dollars)
(Additional reporting by Stephen Aldred in HONG KONG; Editing
by Denny Thomas and Stephen Coates)