Dealtalk: Buyout firms pass up pricey deals to build instead

LONDON (Reuters) - If you can’t buy a market leader, why not make one? That’s the strategy of some buy-out firms amid intense competition for top-notch businesses and prices as high as they have ever been.

Instead of slugging it out at auction for tried and tested assets, they are rolling up their sleeves and building businesses with a succession of smaller deals in so-called “buy and build” strategies.

Buyouts all but dried up after the financial crisis as tight credit conditions and shaky economies forced firms to batten down the hatches. As appetite returned, “pass the parcel” deals between rival buyout firms have dominated and big houses are once again contemplating $5 billion and even $10 billion deals.

But some firms are casting the net wider for less competitive, cheaper acquisitions and bolstering companies they already own, hopeful that when the time comes to sell buyers will be lining up.

“If you want to do attractive deals, you have got to think a little bit more creatively about where you find them, especially in the current environment where there is an oversupply of private equity capital to be invested,” said Permira partner Charles Sherwood.

“We would rather invest in a fast growing company to do buy and build than chase after a large, high-profile secondary buyout at auction where the price is being bid up,” he said.

The number of European portfolio company add-ons is running at 60 to 70 deals a quarter in 2010, said Neil MacDougall, managing partner at private equity firm Silverfleet Capital.

That’s an improvement on last year’s 203 deals, but far short of the 497 deals sealed at the peak of the buyout boom in 2007, according to figures from Silverfleet and Mergermarket.


The best hunting grounds for buy and build deals are fragmented markets where smaller businesses have come under greatest pressure, private equity managers say.

Unlike secondary buyout deals made at high earnings multiples that firms could struggle to match when they come to sell, the strategy allows businesses that have weathered the downturn well to scoop up rivals, often at a lower valuation multiple than the group as a whole.

Mid-market private equity firm CapVest has bolted 16 smaller coffee suppliers in Spain to its United Coffee business since late 2009. It could add another 10-15 smaller coffee roasters in Spain alone in the next year, said CEO Per Harkjaer.

Permira hopes Spanish online travel agent eDreams, Irish medical device firm Creganna-Tactx and Asian satellite business ABS, all bought this year, will be platforms for consolidation.

Many possible add-on deals fail to happen because of sellers’ high price expectations or a clash of management personalities, some of the private equity partners said.

But a history of integrating often family companies can open doors to exclusive talks or a very limited field of bidders.

"Once you are known as someone who buys businesses it becomes easier," said Ulf von Haacke, partner and managing director at listed private equity firm 3i Group III.L.

Once built, these kinds of companies should have a string of suitors and could appeal to strategic buyers, not just rival buyout firms, said Permira’s Sherwood.

“We’ve found that whenever you change business for the better in a significant way, there are going to be people lining up to buy it,” said CapVest partner Christopher Campbell.

3i’s Norma Group, a German maker of flexible joints built up through acquisitions in Europe and the United States, is preparing for a possible stock market listing next year, which could value it at more than 800 million euros.

It is still considering a number of possible add-on deals, von Haacke said.

“Buy and build is generally recognized as a sensible way for private equity firms to add value to their portfolios. Has everyone got religion on this? No. But are more people aware of it? Definitely,” said Silverfleet’s MacDougall.

Editing by David Cowell