What's left to be taken private?
Visit to B.C. a tour of private equity, merger world
Peter Hodson, Financial Post
Published: Thursday, May 17, 2007
Last week I spent some time in British Columbia. I stayed at a nice hotel, went skiing, had a coffee, went shopping, had a beer or two, and went to the casino, made a few phone calls. It was fun. There was some work involved, too.
Why am I telling you my recent travel log? Well, at the end of the week it occurred to me: It was, effectively, a tour of the private equity and merger world: - Accommodation: I stayed at the Four Seasons, now owned by a group of private investors, Bill Gates being one of them; - Skiing: Whistler, formerly owned by Intrawest, is now owned by hedge fund Fortress Investment Group; - Coffee: Van Houtte Inc. is a coffee company about to be privatized by LittleJohn & Co.; - Gambling: Gateway Casinos Income Fund is in the process of being privatized by New World Gaming Partners Ltd.; - Shopping: Hudson's Bay, acquired by Maple Leaf Heritage Investment; - Beers: I only had two, but does it matter? You name the brand, it is private or about to be, whether it was Labatt (years ago privatized), Sleeman (acquired by Sappuro last year), Lakeport (recently acquired by InBev) or Brick Brewing (which put itself up for sale on Monday). - Phone calls: Who would have thought BCE Inc. could have even possibly been in the privatization game?
There has already been a record $2-trillion in global deals so far this year. In the merger and privatization world, in fact, April was the biggest month ever. At this rate, you may not recognize the TSX index in a couple of years.
Email to a friend
Printer friendly
Font: ****I have more than a couple of observations about the M&A and privatization boom.
First, it is being fueled by extremely easy access to capital. There is a glut of liquidity worldwide, and buyers can borrow almost any amount of capital, at very attractive long-term rates. Credit and credit risk, in my opinion are not being priced properly, and until that changes, the merger boom will likely continue. With recent weakness in the U.S., an uptick in interest rates may not be in the cards anytime soon, further extending the trend.
Another factor fueling the boom is that equity market participants are thinking too short term, whereas corporate and private equity buyers are thinking, if not long-term, then at least medium term. This is most striking, of course, in the resource sector, where the M&A frenzy has truly been heating up. The market continues to price the shares of resource companies as if the world is already in the middle of a sharp recession, whereas most commodity prices are simply not reflecting this.
Nickel prices continue to hit record highs, which explains why most nickel companies in Canada have already been bought, or are in the midst of being taken over.
Corporate buyers think differently than the equity market. Xstrata PLC is going to be in the mining business forever, so why wouldn't it pay six times earnings for LionOre Mining, considering its long-term focus and higher valuation?
Or, consider Quadra Mining, which at four times earnings trades at about half the valuation of Teck Cominco. Is it any wonder Quadra put a shareholders' rights plan in place a month ago? Or China Molybdenum, trading at 28 times earnings, while producer Thompson Creek Metals hovers around 10 times earnings.
Either the market reprices equities in this space, or companies will continue to be bought. These ratios are all from Bloomberg, and exclude cash, which raises another point:Most companies in the resource sector are sitting on cash, and generating more cash each day. For corporate buyers, that cash reduces the cost of any takeover, and every day that goes by reduces the risk of a transaction because of the incremental cash generated by the target.
A new trend emerging in buyouts recently could add fuel to the fire. In late April, audio equipment maker Harman International Industries Inc. agreed to be acquired by KKR and Goldman Sachs Group Inc. for about $8-billion. As part of the deal, KKR and Goldman are offering Harman shareholders shares in the new private company. The stub equity could be as much as 27% of the company, and would allow shareholders to profit from future events at private-Harman.
Think about the implications of this, apparently the first time investors have been given the option of private shares in a large takeover. If KKR and Goldman can issue paper in their takeovers, then their leverage has just increased substantially. They no longer need a full $8-billion to take Harman over, and the equity freed up can be re-levered and used to buy something else.
We will know in a few months if this deal flies. If it does -- watch out! If buyout companies start throwing paper around instead of cash, then it is likely that no company will be safe from a potential buyout.
What ends this party? I can't tell you, as it will likely be an external exogenous event. Some investors I talk to say the privatization game will end when there is a large, "bad" deal. That may be, but if so it is likely years away.
Any buyout today, considering valuations and cash levels, is unlikely to be a complete disaster. Even if it is, the private equity group will do what it can to restructure the asset, divest divisions or re-float the company. If all of that is unsuccessful and it truly is a bad deal, it is the banks and the investment dealers that will ultimately take the hit.
Considering the skill and maneuverability of the private equity groups, the time lag between a "bad" deal and the ultimate economic response to a bad deal could be several years. In the meantime, the buying will likely continue.
peter@sprott.com
- - - - Peter Hodson is a senior portfolio manager at Sprott Asset Management.
Zurück
Weiter
