Britain’s top private-equity deals
The Sunday Times – 2 February 2003
John O’Donnell and Rupert Steiner
Venture-capital houses, flush with funds, are doing deals where plcs fear to tread. Report by John O'Donnell and Rupert Steiner.
IN THE global game of bingo, John Kelly looks set for another full house. Except the "houses" that Kelly, chief executive of Gala, Britain's largest bingo operator, keeps winning are of the venture-capital variety.
If talks with Candover and Cinven succeed on Tuesday, Gala will be Britain's first large three-time buyout. In five years, under Kelly's tenure, the company will have been passed on to three private-equity houses - each walking away with their own mini-jackpots.
The "triple" marks a milestone for private-equity firms. Once peripheral players, they have become the new conglomerates and one of the most important sources of funds for middle-market businesses.
They are attracting some of the top talent too. Only last week, Marks & Spencer's Luc Vandevelde launched Change Capital Partners, his new fledgling private equity outfit with Pounds 640m in funds.
Apax has Mike Grabiner, former chief excutive of Energis, working with it, and Ford's Jac Nasser has joined One Equity Patrners in Chicago.
Today, exclusive research reveals the top 100 private-equity deals of last year.
The table, called Deal Track 100, lists buyouts in order of size.
It reveals that last year's biggest deal was the Pounds 2billion sale of the Unique Pub Company by Nomura's Guy Hands to a group led by Cinven. Others include the Pounds 867m acquisition of Arcadia by Philip Green, Cinven's Pounds 820m buyout of National Car Parks, and the Barclay brothers' purchase of Littlewoods in a Pounds 940m deal.
Experts predict another flurry of private-equity buyouts this year, and the Gala deal could be the first important transaction.
The business was part of a portfolio owned by Bass, which has since been renamed Six Continents and is still going through disposals and refocusing. PPM Ventures spent Pounds 234m on Gala's 130 bingo clubs in December 1997 when Kelly, then at Mecca, took over as chief executive. It almost doubled in value to Pounds 400m three years later after the acquisition of Ritz Casinos and Jarglen, a Midlands bingo group.
PPM sold out to CSFB, which expanded the business to 165 clubs by adding 27 casinos from Ladbroke to the group.
Kelly announced last year he wanted to float the business. And although this is still the long-term plan, bad stock-market conditions have prompted him to enter into talks with other private-equity houses.
CSFB, Gala's present owner, is in exclusive negotiations until Tuesday with Candover and Cinven to sell the Pounds 1.25billion business.
While this size of deal would once have been the preserve of public companies and their advisers, today private equity is beginning to dominate.
Private-equity investors are already behind half of all mergers and acquisitions (M&A) activity each year.
Andrew Burrows, a director of the Centre for Management Buyout Research (CMBR), part of Nottingham University, says: "Even though the total value of private-equity deals is down, it is nothing like as far down as general M&A activity. Private equity accounted for about 45% of corporate activity last year and I think you will see that increase in 2003."
When buying opportunities arise, trade buyers are stepping aside for private-equity players. These houses have large cash reserves because they raised their funds up to four years ago when confidence was high. As economic gloom has cut a trail of destruction across the corporate landscape, few of the big public companies now have the confidence and financial firepower to compete with them.
"Where there are no companies around to buy a business, the only buyers left are private-equity houses," says Burrows.
Gala's Kelly, now an expert in working with venture capitalists, says everything comes down to choosing the right partner. "Management teams often feel like they are victims when looking for finance," he says. "But a great business deserves a good partner."
Private equity has received a big boost from public companies that have become disenchanted with the low ratings given to them by the stock market. Eight of the companies on the Deal Track 100 were quoted on the stock market before being bought by financial buyers. These include Brake Brothers, the foods business, and Esporta, the fitness chain.
"At the start of last year, investors who had large blocks of shares were not willing to sell because they thought they could get a better price," says Burrows.
"But that has changed and public-to-private deals will be an important part of the market as the year progresses."
Nigel McConnell is managing director of Electra Partners, one of the country's most respected mid-market operators. He says: "You have only to think about where the FTSE 100 is against where it was. And share prices outside the FTSE250 have moved even more - in many cases they have dropped by half. Many of these are good companies and the low share price is not to do with the earnings outlook but because people do not want to be in them. I think in the next 18 months a lot of companies will be taken private."
Jon Moulton, managing partner at Alchemy, has also seen a jump in public companies in distress. "Taking small companies private is a growing area of activity for Alchemy. Since the start of January we have had up to 20 such companies approach us. The stock market is full of small companies that think they are being undervalued, are struggling to raise cash on the market or get the attention of investment bankers.
"Being a listed company is getting less and less attractive - my guess is it is going to be a pretty bad year for the markets."
But public-to-private deals will not be limited to the smaller end of the market.
Jonathan Russell, executive director of 3i, says private-equity investors are prepared to back bigger deals. "What's happening now is that the larger public-to-private opportunities have become realistic," he says. "Whereas before private equity may have looked at deals of less than Pounds 200m, now it's up to Pounds 500m. They have more money to put to work."
Some of private equity's biggest names, such as Apax, BC Partners and KKR, are absent from the Deal Track. But Sir Ronald Cohen, who founded Apax, says there is already more activity this year.
"Company valuations are getting better for us," he says. "Private equity has the biggest pool of finance available. At Apax we have a huge pipeline of deals and I think that, when the history books get written, 2003 has a good chance of being proved a good investment year."
DEAL TRACK 100
Deal Track 100 is compiled by Fast Track and coverage is by Sunday Times journalists.
Fast Track is an Oxford-based research, publishing and events company that tracks the UK's most dynamic unquoted companies.
Fast Track has published league tables in The Sunday Times for six years, including the Fast Track 100 table of Britain's fastest-growing unquoted companies.
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