Public-to-private transactions (PTP) are well and truly back on the private equity agenda. While by no means reaching the peaks of 2006-7, ‘take-private’ deals have picked up in the last two years and look set to accelerate in 2019.
In this week’s blog, we’ll look at how PE’s means, motive and opportunity for PTP could align in 2019 and what makes this increase so different to the pre-crisis boom.
The story so far…
The graph below charts almost two decades of PTP transactions, from the rarity of the early-2000s, through the boom of 2006-7, the post-crisis slump and the recent uptick in activity.
The most notable moment in PTP history is clearly the 2006-7 peak, when private equity firms acquired over $650b of companies from public markets – almost 50% of PE’s total acquisitions in that period. Exceptionally liquid debt markets and a large population of quoted companies provided fertile ground for deals until the crunch in 2008, when the financing dried up and lender appetites were further diminished by rounds of PTP restructurings.
Since 2013, the PTP market has staged mini-revivals. Burgeoning war chests, increasingly liquid debt markets and rising private-sector valuations have encouraged private equity to run the numbers on quoted companies again. But bullish equity markets – and competition from a corporate M&A boom – have limited opportunities.
So, why might PTP deals accelerate in 2019? We think the outlook contains a better alignment of means, motive and opportunity, which could inspire more deals. Although, all these elements are very delicately balanced and, while there are some similarities to the previous boom, there are some very important differences that will limit and change the nature of PTP deals in this cycle.
Private equity once again started the year sitting on a record amount of ‘dry powder’. What’s new in 2019 is the profile of this war chest. A recent survey from Dechert and Mergermarket shows that more than a quarter (27%) of respondents had established long-term hold funds and almost a third (32%) were considering it.
This long-term perspective potentially offers a greater alignment with ‘take private’ deals, since it enables PE to hold onto assets for longer making bids more attractive – not least to management teams and regulators.
The problem with a market awash with liquidity is, when there is only a finite amount of assets to buy, prices inevitably rise. PE and corporate competitors for assets have pushed valuations higher, making it harder to find value. As a result, there is a strong motive for PE to diversify and become more creative in its search for assets.
PTP acquisitions by no means an easy option. They are often complex and require a higher level of transparency and speed than buying un-listed assets. As with other transactions, PE’s calculations won’t normally include synergies in their valuation, making it harder to compete with corporate rivals. But, private equity bidders may find it easier to access finance in some markets than corporate bidders and taking companies private can offer other opportunities, such as taking a longer-term view outside of the requirements of public reporting.
PE also brings its own tool kit to transactions. This includes operational and, increasingly, sector expertise, with significant investment made into specialist teams in recent years. PE generally focused its recent PTP activity in areas where they have existing assets and expertise, or more niche areas that are less attractive to corporate buyers.
But the numbers still need to add up. And, what could really make the difference in 2019 is a softening of stock-market valuations. In January, global stock markets recovered some, but not all, of the ground lost in 2018. This leaves valuations still high overall, but the year ahead looks set to bring additional volatility and increasing pockets of under-valuation.
We can see this in the UK, with otherwise solid companies in ‘riskier’ areas not experiencing the general market uplift in share prices, whilst also finding it harder to access financing – as we discussed last week. Increasing shareholder activist activity may also work in PE’s favour if market values remained depressed.
As markets turn, there are also turnaround opportunities, including assets under pressure from short-sellers or those who have lost value through repeated profit warnings. UK companies are currently losing a fifth of their market value, on average, on the day of profit warning. Such falls can offset the bid premium usually required on a public deal.
Thus, if the funding and opportunity stars continue to align, I think we will see PTP deals pick up even further in 2019. But, there are several elements that make this a more complex environment than 2006-7, with additional practical, economic and regulatory considerations that could also limit activity…
A lower number of
The NYSE and the NASDAQ have fewer publicly traded companies than at any point in the past four decades. The number of UK quoted companies has fallen by about a third since the end of 2007.
The delicate balance of liquidity, confidence and valuations.
Synchronised global growth is unwinding and geopolitical risks are rising. Falling market confidence may lower valuations and limit corporate competition for assets – but this fall is unlikely to come without earnings pressures and implications for lender confidence.
A stronger regulatory, political and social spotlight
The revised UK Takeover Code requires greater bid transparency and speed, along with requirements for bidders to set out their source of funds, along with plans for headquarters, research and development functions, pension funds, staff and any redeployment of the target’s fixed assets at the outset of any bid. Beyond regulation, firms need to think about their approach to deals and how they can demonstrate financial and social value, with governments increasing intervening to protect nationally important assets.
Finding that sweet-spot of value is hard – and harder still to develop and hold onto in an increasingly disrupted world. Firms will need to focus on operational improvement in PTP to release value. But, even before they embark on a transaction, they should think about disruptive diligence. The companies that PE firms are acquiring and transforming will be increasingly competing with companies that haven’t even been created yet.
But that’s the case with all transactions and changing market dynamics could open more PTP opportunities in 2019 and, with PE looking to expand its horizons, we expect more firms to take them.
Edited by Kirsten Tompkins