A mismatch between over-optimistic vendor expectations and the prices buyers are willing to pay is the biggest impasse holding up buyout activity in the top end of the European market.
Speaking on a panel at the Debtwire European Forum 2012, CVC Capital Partners' head of financing Hugh Briggs said: “The primary reason you're not seeing deals is not the lack of willingness on the part of banks to look at deals, but the willingness of vendors to sell at a price that accurately reflects the uncertainties that people face in many of their businesses today.”
Briggs noted that two years ago many had hopes of a rebound, and this anticipated recovery was reflected in hopeful business plans – many of which have not fulfilled their potential.
“There's a growing sense that it won't necessarily be better; there's a good chance that it will stay very much the same and it may even get worse,” he told the audience.
Recent figures from the Centre for Management Buyout Research show that ten deals with €1bn-plus price tags have completed so far in Europe this year, totalling €14.3bn and accounting for 38 per cent of the entire private equity market.
However, there are currently only five large-cap buyouts awaiting final bids, including French medical diagnostics business Labco; Waterland's Dutch trust manager Intertrust; and CVC's Dutch store group Matas, for which banks have already lined up a €500m package.
But a number of auctions have been derailed by a gap in vendor expectations, while the usual summer lull and Olympics have postponed deals and added weeks to GPs' fundraisings.
“For private equity firms, a lot of them are out there fundraising and they want to see big prices and big gains and that's difficult for them,” said Briggs, adding that corporations are unlikely to buy at the moment unless they have a “categoric strategic imperative”.
Shareholders are not rewarding corporations for merging and acquiring but returning cash as investors seek out yield-like returns. This week's $20bn acquisition of Sprint-Nextel by Softbank, the biggest outbound Japanese M&A deal in history, saw the lender's shares plummet 20 per cent before recovering around half of that loss yesterday.
Meanwhile, a handful of top-flight assets such as CPA Global, Wood Mackenzie and Bartec have traded this year at heady multiples, giving hope to willing vendors eager to return cash to LPs and kick-start their new funds.
“Every sponsor thinks they've got a business like that and they might be misguided about those assets but they're holding out for a better day,” said Tom Smyth, co-head of European debt advisory at Rothschild. “Now is actually a great time to be doing deals – there's plenty of debt and there's plenty of unspent private equity money.”
With banks and institutional debt investors eager to back quality credits, prices have fallen by roughly 50bps in the mega market in recent months, added Paolo Grassi, head of leveraged loan syndications EMEA at BNP Paribas.
Mario Draghi may have calmed investors in August by guaranteeing that the European Central Bank will act as lender of last resort in buying up peripheral members' gilts, but there is still enough anxiety to sustain secondary churn.
“A lot of the deals that are getting done are with existing syndicates who are familiar with the asset and where sponsors feel comfortable,” said Howard Sharp, head of leveraged capital markets at GE Capital. “With primary deals there's a lot more uncertainty, and doing something is seen as better than doing nothing.”
All panellists agreed that the rest of the year is likely to be subdued, with deals rolled over to the new year, typically the busiest time for private equity as its portfolio businesses reach the end of their fiscal years in the first quarter.
“Smart sellers will have been doing all the preparation they can around getting the accounts done as soon as possible, working on potential offering memorandums for high-yield and maximising the routes of funding for buyers,” said Briggs.