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Public To Privates: A Growing Trend?


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Public To Privates: A Growing Trend?

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