Playing a waiting game

Public-to-private deals drive the buy-out market as more traditional deals grind to a halt. Mark Dunne reports

Public-to-private deals drive the buy-out market as more traditional deals grind to a halt. Mark Dunne reports

Arthur Robinson is definitely a man with a plan. In the past two years, the chief executive of Runcorn-based Raphael Healthcare has opened a 41-bed hospital and is in the process of developing a second site to meet the growing demand for mental health services for women.

He wanted more, faster, but had a problem – he didn’t have the funds to do it.

Robinson discussed how best to finance the growth of his business with accountant Dow Schofield Watts. They recommended private equity and introduced him to John Dillion at RJD Partners.

Dillion was looking to back a specialist healthcare company and after speaking to Robinson and chairman John Lamb, he agreed to invest £6.1 million for a 20 per cent shareholding in the business. This has enabled the duo to search for two further sites to add to their portfolio.

Robinson said. “We could have gone down the bank debt route, but it would have meant a slower take-off. The investment from RJD puts cash on the table and gives us the opportunity to start looking at other sites. It has given us a two- year headstart in the strategic development of the business.”

Rapid decline

Robinson is relieved that Raphael managed to attract the funds for expansion from a private equity firm. The achievement is all the more surprising as figures released by the Centre for Management Buyout Research (CMBOR) show that private equity investment in the first six months of the year was at its lowest since 2004.

In total, £11 billion was spent by private equity firms in the UK between January and July, a drop of more than 50 per cent on the £24.5 billion invested during the same period in the previous year.

Marcus Golser, senior partner at Graphite Capital, admits that his firm’s backing of the £95 million buy-out of shoe company Kurt Geiger in February is the only primary deal it has made in 2008.

“In a period of so much uncertainty and downward movement, it’s not a good time to invest as buying opportunities have not crystallised to a great extent,” Golser said. “On the other hand, you are unlikely to get the best price for good assets, so I would say it is a time to sit on your hands for a while.”

Alex White, partner at BDO Stoy Hayward, has also seen private equity firms delaying some of their exits as they are trying to assess what the impact of the credit crunch will have on valuations. He is observing two different sides of the industry.

“There’s real uncertainty in the market at the moment and there is a divide between private equity buyers who are increasing their equity funding to maintain deal flow, and those who are looking to use the current situation as an opportunity to drive down prices,” White said.

“The market has never been less homogenous. A year ago, you had a process, worked hard and someone bought the business for ten times EBITDA. It’s just not like that anymore. It’s divided in terms of the values they will pay.”

Private plans

A lack of opportunity has led to the top four private equity deals (in terms of value) in the first six months of the year being public-to-private transactions.

The leader was media group Emap, which cost £2 billion, and was followed by £1.3 billion for Biffa, £900 million for Abbot Group and Northgate Information Solutions changing hands for £500 million.

Deloitte corporate partner Mark Pacitti said public-to-private deals make up 48 per cent of the market value. “With private vendors unwilling to discount, it is likely that we will see more private equity firms circling public companies.”

White tends to agree that public-to-private is going to be an active area in the upcoming year.

“It’s hard for public companies to recommend offers when share prices are declining because they don’t really know if there is a chance of recovery or not. You need a sustained period of a stable share price, albeit at a lower level, to make promoting an offer easier. We are entering that period now where public company share prices are not declining as much anymore.”

He believes that public companies are also being targeted by private equity firms because there are some quality businesses on the markets that are profitable and generating cash.

Winners and losers

According to a survey compiled by Bowmark Capital, industries that are winning development capital include publishing and media companies, healthcare firms, business services and travel and leisure groups, but it’s a reversal of fortune for the retail and construction sectors, with drops of £12.5 billion to £400 million and

£1.8 billion to £300 million in the respective sectors compared with the first half of 2007, says CMBOR.

Golser confirms that there are buoyant sectors, such as oil and gas and healthcare that are getting private equity cash as well as the manufacturing and construction industries, albeit to a lesser extent.



In May Dunedin Capital Partners, a mid-market private equity house, financed a £6 million re-capitalisation of Capula, an IT specialist serving the energy, utility and nuclear markets.

The firm, which backed a £30 million buy-out at the Staffordshire-based company in 2006, provided the funding to enable Capula to grow its operations.

Healthcare Homes Group

Bowmark Capital bought Healthcare Homes Group, an elderly residential care provider in East Anglia, from August Equity for £75 million in April.

August originally invested in the £37 million MBI of Healthcare Homes in August 2005, when the group comprised four homes and 100 beds. On exit it had more than 800 beds across 21 homes after the private equity firm had funded eight acquisitions for the group.

World Class Learning Schools & Systems

In April, Sovereign Capital supported the £34 million management buy-out of World Class Learning Schools & Systems, a London-based company that operates six schools educating more than 2,000 pupils at its five British schools in the US and one in Qatar.

The buy-out was led by chief executive Marcel van Miert, who has known Sovereign since 2003.

Ashtead Technology Rentals

Phoenix Equity Partners bought Ashtead Technology Rentals, a provider of rental equipment to the offshore oil and gas sector, in a £95.6 million deal.

This was the eighth investment from Phoenix’s £375 million fund raised in April 2006. The buy-out of the Hertfordshire-based business was led by managing director Andy Doggett and Andy Holroyd, who is president of its North America operations.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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