LONDON Private equity firms are on the hunt for cheap Spanish companies that can give them a springboard into fast-growing Latin America, raising hopes for a pick-up in deals next year as bank-related sales slowly get off the ground.
Spain's financial crisis has cut the price of its corporates, but also effectively frozen local lending for private equity deals as banks shrink their loan books.
While the lack of debt and the gloomy domestic outlook are putting many dealmakers off, others see a golden opportunity to pick up bargains with little competition.
"Hypothetically, if you can find any company where its reliance on the economy is de minimis, you might find yourself a great deal," said Scott Freidheim, Europe CEO of Investcorp.
With the Spanish economy on its knees, buyers want companies that make most of their earnings from emerging markets such as Latin America, or are in areas such as healthcare and telecoms, seen as resilient in the face of restricted consumer spending.
Investcorp, KKR (KKR.N) and Bain Capital are leading the vanguard of private equity buyers into the Iberian peninsula.
"I think there is a real opportunity in Spain," KKR co-founder Henry Kravis told reporters recently.
Just a day later, KKR made an offer for a stake in NH Hoteles, which has more than half its hotels outside Spain, through bonds that would convert into equity - a structure that can be used to work around the lack of financing available for Spain's corporates.
Bain Capital made its first foray into the Spanish market in October with a deal worth 1 billion euros for call center, Atento, which has a strong presence in Latin America.
But not all private equity houses are ploughing in.
Mid-market house 3i (III.L), which is cutting costs as part of a global restructuring of its underperforming business, is pulling out of Spain, providing an opportunity for rivals.
Its retreat has yielded a new deal for Investcorp, which bought Esmaglass, a maker of colors and glazes for floor and wall tiles with a strong international presence, from the London-listed group in the summer.
3i still has eight investments in Spain, including funeral services group Mémora Inversiones Funerarias, which the firm will gradually sell as part of its retreat.
Private equity houses and hedge funds have been circling Spain for months in the hope that a banking sector shakeout will deliver a bonanza of real estate and distressed company assets at rock bottom prices.
Spanish lender Popular (POP.MC) this week sold a 1.14 billion euros portfolio of troubled consumer loans to a consortium of international investors, in a sign sales are beginning to pick up.
More deals in the property sector or on other portfolios such as consumer loans are likely to take place early next year, bankers have said.
But with Spanish property prices set to keep falling, international investors have so far been reluctant to invest in Spain's so-called "bad bank".
"We have not seen any fire sales from savings and loan companies. We have not seen any rush to sell," said Emilio Domingo, partner at consultancy firm Bain & Co.
That paralysis extends to the corporate M&A segment where a wide gulf between what sellers expected and buyers were prepared to pay stifled many potential deals, he said.
PRICES TO KEEP FALLING
Speaking at a conference in London recently, Carlyle Group (CG.O) co-founder Bill Conway said prices in Spain are among the cheapest in Europe, at an average of seven times earnings, 10 percent lower than the 10-year average.
While far from the bargain basement prices some would like, it is below the 8.1 times average for deals across Europe in 2012, according to figures from data firm Preqin.
The frozen banking markets and shrinking economy will continue to force those prices down, dealmakers say.
While few predict a rapid improvement in bank lending, debt is increasingly available from other sources - when Investcorp bought Esmaglass it borrowed from specialist debt funds rather than banks.
And that could help pave the way for more sales next year.
"I expect 2013 hopefully to be a better year because some of those seller expectations are coming down, and some of the buyers have understood that the fire sale is not happening," Domingo said.
(Editing by Carmel Crimmins and Mark Potter)