Corporate Finance : Mergers & Acquisitions

As European Companies Restructure, They Find Americans at the Gate.

The European private equity market is growing rapidly, as US buyout firms seize opportunities to help restructure corporate Europe.

The value of mergers and acquisitions in Europe that were financed by private equity firms rose 25% last year, to $147 billion, according to Dealogic.

The rash of deals in recent months with financial sponsors seems to portend another big year for private equity buyouts in 2005, according to industry participants.

In February Apax Partners, a US-based private equity firm, agreed to acquire Woolworths, a London-based retailer of general merchandise and home entertainment products, in a $1.5 billion leveraged buyout.

Also in February Texas Pacific, another active US private equity firm, planned to acquire British Vita, a Manchester-based manufacturer and wholesaler of polymer-based products, in a $1.2 billion LBO.

But the deal that attracted the most attention in February was the offer by US buyout group Blackstone to buy a majority stake in Wind, the third-largest Italian telecom, in a bid that valued the company at $16.6 billion. If successful, the Wind buyout would be the largest LBO ever in Europe, and worldwide it would rank second only to Kohlberg Kravis Roberts buyout of RJR Nabisco in 1989.

Meanwhile, Barclays Private Equity announced the final close of its second European Mid-Market Fund in February. The fund attracted 1.65 billion within two months. We only started formally marketing the fund in December 2004 but have still had to turn many potential investors away, as we were very quickly oversubscribed, says Brian Blakemore, director of investor relations at Barclays Private Equity.

The fund intends to invest in up to 50 companies in Britain and continental Europe over the next four years.

While economic growth around the world is strong, European economic growth is spotty and must be viewed on a country-by-country basis, says Jeffrey Montgomery, managing partner at London-based GMT Communications Partners, Europes largest independent private equity group focused on the media and telecommunications sectors.

Yet European media and telecom buyout activity remains very high in 2005, as does the level of corporate merger and acquisition activity, he says.

The trend toward higher levels of deal activity will continue well into 2005 and perhaps beyond, Montgomery says, noting that Europe is at an early stage of its industrial restructuring. There is a lot of work to be done, he adds.

The debt markets continue to provide strong support for dealmakers, Montgomery says, and the supply of equity financing continues to be strong as well.

The current high-yield and debt-issuance pipeline volume is high and heavily populated with buyout transactions and a healthy percentage of media and telecom issuers, he says. The increased deal volume is also taking place against a background of stronger growth in advertising spending in Europe, he adds.

Growth in advertising spending in Europe was 3.3% in 2004, compared to 2.8% in the US, according to Montgomery. Advertising expenditures in Britain rose 6.5%, followed by 4.7% in Italy, an economy with very low growth in gross domestic product, he says.

Europe is unexpectedly outperforming the US in this area, Montgomery says. Last year, Europes advertising growth accelerated, while growth in the US gradually slowed compared with initial expectations. We view continental Europe as most appealing now, he says. Europe usually follows the US advertising cycle, which had been strong.

GMT Communications Partners closed its latest private equity fund of E365 million at the end of 2000, from which it is still actively investing. We are about 80% invested and will likely start a new fund sometime this year, Montgomery says.

The uptrend in the European private equity market is being driven mainly by major takeovers. Prices are shooting up due to the stiff competition between bidders, says Jrgen Schaaf, analyst at Deutsche Bank in Frankfurt. The debt portion of deals has risen significantly, he says.

The flipside of the buy-out dominance is that financing for early-stage investments is increasingly drying up, Schaaf says. Practically no money is going into seed money to finance technology startups.

The German private equity market as a whole is growing solidly, with buy-outs essentially determining the rate of growth, Schaaf says.

While Germany attracts a large number of foreign private equity firms that finance big takeovers, it has virtually no domestic participants in this sector, according to Schaaf.

No Pan-European Market

A homogenous pan-European private equity market is not in sight, Schaaf says. The private equity markets in Europe are still highly fragmented, even though a risk-capital market for all of Europe has been a strategic objective of the EU. However, the amount of capital available to be invested has increased dramatically, due to US private equity investors seeking diversification and perceiving opportunities for higher returns in Europe, according to Debevoise & Plimpton, an international law firm that publishes a handbook on the European private equity market.

The EU may be in the process of harmonizing member-state national law, say attorneys at Debevoise & Plimpton, but the job is far from done, and significant differences exist between the member countries in substantive law and deal practices.

Private equity funds on the prowl in the US market have been most active in the healthcare sector, in which they invested more than $20 billion last year, according to Dealogic.

The largest successful financial-sponsor bid in 2004, however, was Sonys acquisition of Metro-Goldwyn-Mayer for $4.8 billion. Sony was backed by Providence Equity Partners, Texas Pacific and DLJ Merchant Banking Partners.

Citigroup was the top advisor to private equity firms last year, with $24.2 billion in volume from 19 deals, according to Dealogic.

Meanwhile, overall US-targeted M&A; in the healthcare sector totaled more than $12 billion in the first two months of 2005, a 79% increase from the same period of 2004.

The biggest US healthcare deal so far this year, according to Dealogic, is the $2.4 billion acquisition in late February of Tennessee-based Accredo Health, which provides specialized contract pharmacy services, by New Jersey-based Medco Health Solutions.

Border Crossing

GMTs Montgomery: European media and telecom buyout activity remains high in 2005

Cross-border M&A; transactions within Europe reached an announced $43.9 billion between January 1 and March 10, 2005, compared to $17.5 billion in the same period of 2004, according to Dealogic.

Intra-European cross-border deals accounted for 42% of all European-targeted merger activity in the 2005 period, up from 10% in the year-earlier period.

The biggest such cross-border deal in 2005s year-to-date total was the acquisition of Spain-based Amadeus Global Travel by UK-based private equity firms Cinven and BC Partners.

Meanwhile, Switzerland-based Novartis became the worlds largest maker of generic drugs by agreeing in February to buy Hexal of Germany and 68% of Eon Labs of the US for a total of more than $8 billion.

Novartis plans to acquire the remainder of Eon Labs for about $1 billion through a tender offer and to merge it, as well as Hexal, into its Sandoz unit, which is currently the number two generic-drugs manufacturer worldwide.

In the financial services sector, Sweden-based Swedbank agreed to acquire the remaining 40% stake it did not already own in Estonia-based Hansabank for $1.8 billion.

Retail Sale

In the largest M&A; transaction in the US market in February, Cincinnati, Ohio-based Federated Department Stores, which owns Macys and Bloomingdales, agreed to buy May Department Stores to become the second-biggest department-store owner and operator in the country.

Federated agreed to acquire St. Louis, Missouri-based May in a stock-swap transaction valued at $14.4 billion, including the assumption of an estimated $6 billion in liabilities.

May owns such brands as Lord & Taylor and Marshall Fields and other stores primarily in the US Midwest.

The deal will create a department-store chain with more than 1,600 stores and $31 billion in annual sales.

The major US department stores are consolidating to attain economies of scale to compete with discounters, as well as luxury chains.

The merger of Sears Roebuck and Kmart Holding, announced in November 2004, will create a company with about 3,400 stores and $55 billion in annual revenue.

Biggest Bank In World

Sumitomo Mitsui Financial Group, or SMFG, Japans third-largest bank, withdrew its offer to buy UFJ Holdings, the countrys number four bank.

By withdrawing its hostile bid, SMFG cleared the way for UFJ to merge with Mitsubishi Financial Tokyo Financial Group, or MTFG, Japans number two bank.

Following eight months of wrangling over the merger ratio, MTFG and UFJ definitively agreed in February to merge in a stock-swap transaction valued at more than $41 billion.

The merger of the two banks, effective next October, will create Mitsubishi UFJ Financial Group, the worlds largest financial services company, surpassing both Japans Mizuho Financial Group and Citigroup of the US.

Meanwhile, Mitsubishi Securities, a 52.3%-owned unit of MTFGs Bank of Tokyo-Mitsubishi subsidiary, agreed to merge with UFJ Tsubasa Securities.

Capital One Buys Hibernia

In the US financial services sector, Maryland-based Capital One Financial, one of the largest issuers of MasterCard accounts, agreed in March to buy New Orleans-based Hibernia, the biggest bank in Louisiana, for $5.3 billion in cash and stock.

The combined company will become one of the top 10 consumer lenders in the US.

Hibernia already has branches in the fast-growing Texas market, and Capital One plans to expand the bank under its national brand.

The acquisition will give Capital One a growth platform and access to an additional source of lower-cost funding, says Richard D. Fairbank, chairman and CEO of the credit-card company, which also is active in auto financing and provides a wide range of financial products and services.

This acquisition is a natural extension of the diversification strategy that we have been pursuing for some time, Fairbank says.

Capital Ones managed loan portfolio totaled nearly $80 billion at the end of last year.

Credit Suisse First Boston advised Capital One on the transaction. JPMorgan Securities and Bear Stearns advised Hibernia.

Gordon Platt