The speed with which the IPO market is becoming the private equity sponsor exit of choice became readily apparent last month with a slew of PE-backed IPOs in Europe. UK retailers Poundland and Pets at Home, together with Danish service company ISS, took advantage of market sentiment to exit private equity-held positions.
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| Henrik Johnsson, head of European high-yield capital markets at Deutsche Bank |
"There have been 30 LBOs in the US so far this year and in Europe there have been five," Henrik Johnsson, head of European high-yield capital markets at Deutsche Bank in London, told Euromoney in mid-March. "The lack of LBO activity in Europe is down to the attractiveness of the IPO market – every single private equity asset that has been owned for more than one year is looking at an IPO. Equity valuations are very high and the sponsor would rather monetize the assets than worry about refinancing risk." Discount retailer Poundland priced a £750 million ($1.24 billion) IPO through Credit Suisse and JPMorgan in March, facilitating an exit for private equity owner Warburg Pincus. The sponsor bought the firm in a secondary buyout in 2010 from Advent International. Pets at Home also undertook an IPO in London in March in a £490 million deal, giving the retailer a market capitalization of £1.2 billion. Joint global coordinators were Bank of America Merrill Lynch, Goldman Sachs and KKR. The latter paid £955 million for Pets at Home in 2010, fighting off Bain Capital and TPG in the process.
Danish service industry firm ISS also floated in March in a $1.5 billion-equivalent deal – its third attempt to re-list since 2005. Global coordinators for the deal were Nordea, Goldman Sachs and UBS. It was sold by private equity firm EQT Partners and Goldman Sachs, which remain major shareholders.
According to PwC, private equity-backed IPOs accounted for 48% of European IPOs by volume in 2013 and 57% by proceeds. That trend is set to accelerate, but deals face stiff competition from well-capitalized trade buyers. "Trade buyers are sitting on top of large amounts of cash and haven’t done any deals for several years," says Johnsson. "They can also pay more than PE buyers due to synergies available. There are likely to be plenty of auctions where trade buyers will come to the fore."
Spanish cable company Grupo Corporativo Ono SA delayed its IPO plans last month as talks with Vodafone over a potential sale intensified. An IPO is expected to value the company at €7 billion to €8 billion and the UK firm is understood to have offered €7.2 billion for a trade sale. Ono’s private equity owners include Providence Equity Partners, Thomas H Lee Partners, CCMP Capital Advisors and Quadrangle Capital Partners. Building products group Grohe was recently sold to Japan’s Lixil, Vodafone purchased Kabel Deutschland and Walgreens is expected to acquire the remainder of Alliance Boots that it does not already own.
"The preference for IPOs and strategic sales has led to a material decline in the recycling of legacy leveraged credits through secondary buyouts," says Edward Eyerman, senior director at Fitch Ratings. "Only the buyouts of Springer and Ista last year represent recent successful recycling of large, widely held legacy LBOs."
This is a breathtaking reversal of fortune for the LBO market, which has enjoyed a healthy run courtesy of investor appetite for yieldy assets. "We believe sponsors will remain sellers and leveraged credit assets will remain scarce unless sponsor return requirements decline with the rest of the leveraged credit complex, or purchase price enterprise values fall," says Eyerman.
This is evidence itself of remarkable appetite for the high-yield credits that are out there. In early March, Premier Foods, the struggling UK food retailer that is supporting £513 million of debt on £350 million of assets and was deemed unfinanceable by many until relatively recently, announced a £1.13 billion refinancing plan. This involves a £353 million equity capital raising together with a high-yield bond issue through bookrunners Barclays, BNP Paribas and HSBC. The single-B rated bond issue was increased in size to £500 million, offering a yield of 6.5% for seven years non-call three and 500bp for six years non-call one. The deal was significantly oversubscribed.
Private equity sponsors are making hay while the IPO market shines, but there have been a couple of wobbles on recent first-day performance and as geopolitical concerns intensify this might become a worry. "The LBO market is up against tough competition from the IPO market, but if there is any kind of market disruption sponsors are likely to revert to LBOs," says Johnsson.
