The option of a take-private – moving a business from plc status back to that of a private company – continues to be a persuasive and rational option for delivering shareholder value and strategic growth for many listed companies disillusioned with the stock market. Darryl Cooke reviews the public-to-private trend
The rate of UK companies abandoning their once cherished plc status and returning to private hands continued to gather pace in 2000, and three words dominated the thoughts of listed companies and their advisers.
Public to privates (P2P) first became fashionable in the late 1980s before falling out of favour again in the early 1990s. Even at the peak of that cycle of activity, in 1989, only 13 transactions took place. Compare that with the level of P2P activity over the last three years – 27 take-privates in 1998, 46 in 1999 and a further 43 last year.
The year 2000 was another good one for the buy-out market in the UK with deal value recording another record high, easily surpassing the previous record set in 1999. While deal volume fell for the third year in succession, 2000 represented the seventh consecutive year of growth in overall deal value in excess of £23bn of transactions completed during the year.
The biggest single factor underpinning this enormous growth in deal value was the rise
of the so-called ‘mega-deal’, the £100m-plus transaction, of which there were 44 in the year. Of these a significant number were P2Ps, accounting for six out of the 15 most valuable deals of the year. These included the largest ever buy-out, the P2P of property company MEPC.
The UK performance was in marked contrast to the position in Europe where P2P deal value fell sharply last year to only £1.6bn from the previous year’s record of £2.6bn. Deal volume also collapsed from 28 deals in 1999 to only 12 in 2000.
When P2Ps accelerated again in 1997, the expectation was that activity would be driven by incumbent management, given the difficulties with due diligence and the need for disclosure in public companies. There has, however, been a growing trend towards investor buy-outs as the process has become better understood.
Apart from the 1989 Gateway buy-in, large, institutionally led P2Ps are a recent phenomenon. Last year saw the £1.3bn buy-out of United Biscuits led by Hicks Muse Tate & Furst and Cinven. In 1999, Hicks Muse had led the £822m buy-out of Hillsdown Holdings and, in 1998, Kohlberg Kravis Roberts & Co led the £851m buy-out of Willis Corroon.
While the number of management-led P2Ps still exceeds the number of institutionally led deals, the average size of these latter transactions – more than £400m last year – remains double the average size of those led by management.
The average value of all public-to-private transactions last year exceeded £200m, the highest level ever recorded – except for 1989 when the figures were somewhat skewed by the £2bn Gateway buy-in.
There have been particular regions and particular sectors where take-private has proven to be an attractive alternative. In Yorkshire, for example, a region built on the fortunes of traditional industries such as textiles and manufacturing – industries which today seem sadly out of favour among institutional investors and City analysts – the trend has been enthusiastically embraced.
Many of these old-economy businesses continue to perform well but have faced growing apathy from the City, which no longer seems to have an appetite for quoted companies with a market cap of less than £500m. In many cases their share prices are significantly lower than their net asset value.
Frustrated at low ratings, the lack of interest from institutional investors as well as the practical costs of being a plc, it is not too difficult to understand why a take-private has become such a viable option for those businesses struggling to fund growth while maintaining a full listing.
Four more of the region’s listed companies left the stock market during 2000 as their stocks struggled to excite and the option of a take-private became a compelling and rational measure to deliver shareholder value. These included the £100m P2P of Allied Textiles and, most recently, the £300m take-private of Peter Black, the third-largest ever to be completed in the UK.
On each of the P2P deals we have acted on during the past year, there was evidence of a strong underlying business and a pronounced share price under-performance created by the market’s disillusionment with smaller plcs in supposedly ‘unfashionable’ sectors.
Explaining the rationale behind the Peter Black P2P, Gordon Black, chairman of Peter Black and also of Beltpacker, the bid vehicle, said at the time: “I think, progressively, we were out of fashion despite good results. The offer presents shareholders with an attractive route for realising their investment at a level which is unlikely to have been possible by any other route in the foreseeable future.”
Research undertaken by the Centre for Management Buy-out Research (CMBOR) reinforces Black’s assessment and underlines the recent trend towards public to privates.
The research showed that, during another record year for the UK buy-out market, both
the size and the number of public to privates increased. The figures speak for themselves. Seven transactions worth £4bn were completed in 1997, compared with 43 during the last 12 months worth more than £9bn, almost double the value of similar deals in 1999.
The public-to-private market accounted for more than 44% of the total buy-out market in the UK during the first year of the new millennium. Although there has been evidence of a market correction in favour of old economy companies, it is likely the P2P trend will continue, but whether it will do so at the levels of the last two years remains to be seen.
Much of the easy fruit has been picked and we are therefore likely to see fewer, but more significant, transactions in terms of size and quality – not least because there is an estimated £35bn of private equity funds chasing public to privates.
Going private is not, however, the only solution for small quoted companies.
In the last 12 months, we have seen other, more innovative transactions on behalf of clients in order to return value to shareholders. These have taken the form of strategic disposals, which have cleared the way for clients to enter into voluntary liquidation in order to return capital to investors.
Oxford Molecular Group was one client to pioneer this approach. Established in 1989, the £18m sale of its Software Solutions division to Pharmacopeia Inc, in September 2000, marked the final stage of the company’s disposal of its operating divisions. In July 2000, the group sold its Discovery Solutions division to Millennium Pharmaceuticals Inc in a deal valued at £35m.
The company’s strategy, looking beyond the sale of its various businesses, is to cancel its listing and enter into voluntary liquidation, returning capital to shareholders.
This may seem a rather aggressive, drastic, or even desperate measure for any rational board, but for those who simply want or need to return shareholder value as quickly as possible, a voluntary liquidation to break up the business is an option many might consider.
Controlled by the members, this particular strategy delivers another option and with it some ray of hope for those businesses whose patience has been sorely tested by the under-performance of their stocks and shares.
Darryl Cooke is head of private equity at Addleshaw Booth & Co.
