American dreams
Most analysts would predict a slowdown in US cross-border deals following the recent fall of the dollar against the pound, mounting national debt and economic uncertainty. They’d be wrong.
When the pound broke through the $2 barrier in April, some might have been surprised to see US private equity firms continue their inroads into UK businesses.
But undeterred by the expense of UK companies, American private equity firms, including giants such as KKR and Blackstone, launched bold plans to buy FTSE 100-listed companies even as the dollar was flying south.
While Blackstone – in partnership with CVC Capital Partners and TPG Capital – foundered in its £9.7 billion bid for supermarket chain Sainsbury’s, KKR has had its £11.1 billion bid for pharmaceutical retailer Alliance Boots accepted by shareholders.
These bids demonstrate the ambition and confidence of US private equity houses as they eye opportunities in the UK and mainland Europe.
“More private equity and hedge funds continue to establish operations here in the UK and Europe because of the perception that Europe still offers investment opportunities that are more attractive than US opportunities,” says Brian McKay from US investment bank Houlihan Lokey Howard & Zukin. “There is also scope for cost reductions, consolidation, add-on investment and growth relative to the US. Many US-based private equity and hedge fund clients believe they have perfected investment models or approaches in the US and are looking to apply those… here in Europe.”
Private equity firms have not just targeted big ticket deals, the mid market has also been loomed large for US firms. “Spaces such as consumer products, business services and capital goods are seeing private equity buyers paying multiple levels considerably higher than previously,” McKay says. “This has been driven almost entirely by the amount, pricing and structure of leveraged finance available.”
Trading up
But this influx of investment has often come at the expense of other buyers. “Trade buyers are struggling in the mid-market,” says Robin Johnson, a UK-based partner at law firm Eversheds . “We have situations regularly on auction deals – and there are some strong auction deals going on – whereby trade are coming in at the lowest end of the bids and… when you’ve private equity with lots of money chasing deals and prepared to pay more, it is very difficult to put a trade buyer in.”
Johnson added that private equity houses have been doing deals up to 13 times ebitda and still had other investors wanting to come in on the deal. But he does not believe this is sustainable and the industry will dip at some point. “There is a maturity in the market which would indicate that when it happens it will be more along the lines of restructuring than crash and burn,” he says.
Coming to America
Nevertheless, trade buyers have not found the small to mid-market totally barren. For example, US manufacturer RBC Bearings bought Gloucester-based Phoenix Bearings for $4.3 million [£2.2 million] in cash in May.
UK acquirers have also targeted the US. For example, oil and gas exploration firm Sterling Energy plc bought Whittier Energy, a Houston-based onshore US Gulf Coast exploration and production company, for $145 million in January.
Sterling, which is based in Harpenden in Hertfordshire, bought Whittier, a Nasdaq-listed company, because it complemented its existing US assets.
Elsewhere, agricultural biotech business FuturaGene plc bought US-based CBD Technologies, a biotech company that uses environmentally friendly processes to produce paper, for £3 million in December 2006.
Indeed, there has been significant activity among UK and European players seeking to grow by acquisition in the US, but it is not necessarily down to the attractiveness of businesses in terms of the weak dollar.
“The relatively low dollar might imply assets are cheap in euro or sterling terms, [but] the corresponding cash flows are less in local terms as well,” McKay says. “The question comes down to expected outlook for the dollar versus sterling or euro, which is entirely uncertain.
“It’s the right time to buy for UK acquisitions when the dollar is low, but expected to increase. It’s a condition that many of our clients believe is the case now.”
As a result, McKay expects M&A volumes to continue at their current level and possibly increase. “There are very strong credit and equity markets and there are unprecedented liquidity and piles of cash in private equity and hedge funds that need to be invested,” he said. “Further, the wave of top of market large-cap mergers and acquisition deals will result inevitably in a follow-on wave of non-core divestitures and bolt-on deals.”
McKay added that the large US current account and trade deficits are an issue influencing the outlook for the US currency and economy. It’s a concern is modest compared to the cash that needs investing by private equity companies. “[But] if the economy goes south, that may signal further buying opportunities,” he says.