Private equity takes a renewed interest in UK plc

Private equity’s appetite for corporate Britain is back, as groups seek to revive a takeover frenzy that has seen nearly £80bn spent taking UK public companies private over the past five years.

The deal-doing flurry seemed to have fizzled out in 2022, as geopolitics and rising interest rates muted takeover plans. But in the past week, investment giants from Apollo to CVC Capital Partners have kicked off a series of multibillion-pound talks with publicly listed UK businesses, including Matthew Moulding’s THG, veterinary medicine maker Dechra and credit card processor Network International Holdings. Energy services group Sureserve is also subject to a £214mn takeover offer from Cap10 Partners, the company announced on Friday.

The approaches signal a resurgence in appetite for dealmaking as debt financing markets improve, and as the UK enjoys a period of relative calm following the turmoil caused by then prime minister Liz Truss’s “mini” Budget last September. Overseas investors are once again hunting for bargains.

“There is something in the UK around political stability and the fact we are beginning to put the mini-budget behind us,” said a senior executive at one large global buyout group.

Private equity groups were among the biggest winners from more than a decade of ultra-low interest rates. Investors from sovereign wealth funds to corporate pension plans deployed trillions of dollars into the asset class in the search for yield.

This money, combined with access to very cheap debt, fuelled a buyout boom with groups taking private a slew of household names in the UK including supermarket chain Morrisons and infrastructure investor John Laing. Since 2018, investors have spent nearly £80bn buying UK public companies, according to PitchBook data.

The acquisition frenzy came to a halt last year as concerns over the economic outlook grew. Central banks raised interest rates, which increased borrowing costs for buyout groups that use debt to fund their deals. A transatlantic banking crisis has not made things any easier this year.

Private equity-backed buyouts globally fell 51 per cent year on year in the first quarter of 2023 to total $136.1bn, according to Refinitiv data. That is still the fourth-largest opening period for such deals since records began in 1980.

The difficult investing environment has left the private equity industry sitting on a record $3.7tn of unspent cash at the end of 2022, according to a Bain & Co consultancy report, money buyout groups are under pressure to spend.

Interest has focused on public companies because they are viewed as comparatively cheap relative to their private peers.

“We are seeing increased interest from private equity firms to acquire public companies due to lower valuations in public markets and increased pressure from investors to deploy capital,” said Miguel Hernández, chief executive of investment banking at Alantra Partners.

Among the deals being discussed at present include EQT’s £4.6bn take private of Dechra, Apollo’s planned deals for Wood Group and THG, a potential bidding war between a CVC-led consortium and Canadian investment group Brookfield for payments provider Network International, and Providence Equity’s takeover of exhibition company Hyve.

The UK, in particular, is viewed as an attractive place to put money to work, particularly for buyout groups that invest funds raised in dollars or euros.

“The reason why the UK public markets are the ‘beneficiary’ of this is because price/earnings multiples across a number of sectors remain depressed, and that, coupled with the continued weakness of the pound compared to the dollar, makes a number of public companies good value,” said Paul Dolman, a partner at Latham & Watkins, a law firm.

The typically low valuations of UK companies relative to their US peers have also prompted several to consider a New York listing, adding to soul-searching about the future of UK plc.

The planned take-privates of Network International, Dechra, THG and engineering services company Wood are all being led by groups investing dollar or euro-denominated funds based either in Europe or North America.

There are still obstacles to the deals getting done. Convincing shareholders they are getting paid a fair price, as well as securing debt financing, are among the most pressing challenges.

Wood, the target of Wall Street giant Apollo, has rebuffed the overtures repeatedly, insisting on a higher price. This has forced Apollo to keep raising its offer, with its latest 240p per share bid 20 per cent higher than its initial offer made in January.

But the prospect of a slowing economy is forcing boards and shareholders to think more carefully before rejecting a bid, particularly if it is at a large premium to the company’s share price.

“Boards tend to dislike being taken private because they lose their jobs, but they don’t have much choice other than to recommend an offer if the valuation is higher by a reasonable amount than the current price”, said Stephen Lloyd, co-head of private equity at Allen & Overy, a law firm.

Banks are also becoming more receptive to financing big-ticket deals again, while the emergence of private credit as an alternative has also helped boost deal flow.

“Debt funding for public takeovers has historically been the domain of the investment banks given the scale of the financing typically required,” said Ross Anderson, a partner at Paul Hastings, a law firm. “However, over the last couple of years private credit has become a credible alternative source of capital for take-privates.”

Despite the increased optimism, a sense of caution remains as investors adapt to the end of an era of easy money and increasing geopolitical instability.

Simon Lyons, of investment bank PJT Partners, said: “The animal spirits are returning but the environment remains fragile.”