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Public To Privates: A Growing Trend?
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Public To Privates: A Growing Trend?

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  • 1. Public To Privates: A Growing Trend? Nikos Stathopoulos Partner, Apax Partners 16 th June 2004
  • 2. Stock Market Investors Are Now Short-Term Investors
    • Financial markets have become very short-term under influence of mutual funds and hedge funds, which have short-term targets to meet.
    • Markets are much more volatile:
      • 1990-1997: Outlier* days varied between 1% and 7% p.a.
      • 2000-2003: Outlier days have averaged 35% p.a.
    • Role of a public company is now
      • ‘ To deliver short-term profits and the expectation of long-term profits’
    *Outlier day = the NASDAQ 100 was up or down >3%
  • 3. The Private Equity Industry Is Therefore Becoming The Long-Term Funder Of Large Corporations
    • When public companies miss their targets, share price falls in overreaction of volatile markets
    • Private equity firms are funded by long-term investors and are capable of stepping in, taking a long term view and returning the companies later to public markets
    • In addition to their traditional role of acquiring divisions of companies
  • 4. What Is A “Public To Private” Transaction?
    • A private equity backed bid for a publicly listed company.
    • Backing management team of the target company (MBO) or introducing “Buy In” management.
    • Traditionally, Public to Private deals have been “friendly” and are recommended or supported by target’s major shareholders.
    • Common characteristics of Public to Private (PTP) candidates are:
      • A large cash position relative to market capitalisation
      • Limited equity research and attention
      • A need to restructure to achieve profitability
  • 5. There are Several Drivers of Public To Private Deals
    • Target companies are often neglected by the market leading to a reduction in share price relative to their underlying value.
    • Valuation discounts are driven by:
      • Concentration of funds in the institutional fund management community
      • Increasing demand for investments in corporates with larger market capitalisation and greater liquidity
      • Shift of Investment Banks’ research away from smaller companies
    • Loss of research and trading coverage can increase volatility and reduce liquidity further.
    • Increasing regulation and disclosure requirements for public companies.
    • Dissatisfaction by management of small to mid-cap companies:
      • Lack of liquidity
      • Lack of flexibility
      • Lack of interest
    • Constant pressure for companies to demonstrate performance
    • Target company may need to undergo:
      • A fundamental reorganisation
      • A restructuring of its debt/equity financing away from limelight of public arena
      • Generate an exit route for major shareholders, when no other viable alternative exists
    External Internal
  • 6. But PTPs face Significant Challenges
    • Requirement for regular announcements during the transaction.
    • Amount of due diligence is often restricted.
    • Limited warranty comfort.
    • Considerable advisers’ fees incurred by the bidder before announcing the deal.
    • Time consuming.
    • Regulatory control.
    • Strict timetable.
  • 7. Public To Private Buyouts In Europe By Number By Value (% Of Deals) UK represented ½ of the value of PTPs in Western Europe in 2003
  • 8. Public To Private Buyouts/BuyIns in the UK In 2003, value of PTPs outweighed the money raised in IPOs for the first time in 3 years Source: CMBOR/Barclays Private Equity/Deloitte & Touche 2003 saw the highest level of PTPs since 2000
  • 9. Industrial Distribution Of UK PTPs Deals By Value (2000-2003) Value £m
  • 10. In 2003, PTPs Accounted For A Quarter Of Total Market Value Of Buyouts In The UK By Volume By Value (% Of Deals)
  • 11. London Stock Market: A Source of Public to Private Buyouts Source: CMBOR/London Stock Exchange 4 10 13 13 12 9 12 7 27 46 42 33 22 36 168 270 347 322 280 252 291 42 70 97 100 72 85 112 126 200 250 222 208 167 179 1997 1998 1999 2000 2001 2002 2003 Buy-Outs ( % Of Total) Buy-Outs ( Number) Total Exits Aim Main Market Year
  • 12. Athens Stock Exchange: A Source of PTPs too?
    • 150 companies have a market cap below €30m.
    • 110 companies have market cap below €20m.
    • 30 companies have market cap below €10m.
    • Turnover of listed companies in Athens Stock Exchange ranges from €2m to €5bn.
    (1) As of 10 June 2004 17 11 17 50 55 198 _____ 348 € 1 billion + € 500-1,000m € 250-500m € 100-250m € 50-100m € 1-50m Number Of Companies Market Cap (1)
  • 13. Looking Ahead
    • 2003 was a record year partly due to unusual market conditions making PTPs affordable:
      • Low equity valuation
      • Low interest rates
    • Future is less certain:
      • Improving company valuations in Europe
        • Major stock markets recovering
      • Impact of currency markets (weak US Dollar)
      • Resistance from institutional fund managers to “cheap takeovers”
      • Requirement for “certain funds” in the EU
        • Funds unconditionally available to fund bid before announcing offer
      • Complication of PTPs
    Question is: Do the advantages of being a public company outweigh the disadvantages?