FT : Private equity accelerates ‘buy-and-build’ strategy

Private equity accelerates ‘buy-and-build’ strategy
Groups seek to get around competition from cash-rich corporates and family offices

Private equity groups are aggressively building new business empires by bolting smaller companies together as they seek to get around increasing competition from cash-rich corporations and record-high valuations for assets.

From dental businesses to veterinarian clinics, buyout groups are spotting opportunities in fragmented sectors where they can amalgamate companies, quickly cut costs and eventually sell them at a profit, a study by Bain & Company reveals.

By merging small companies, private equity groups can boost sales and access larger financing pools for expansion, according to industry insiders. But merging dissimilar cultures and integrating systems is often a challenge.

So-called buy-and-builds have become so popular for private equity groups globally that they have gone from representing 28 per cent of total deals in 2004 to nearly half of all transactions during the first half of this year, says Bain & Company.

In the US, private equity-owned Advanced Dermatology and Cosmetic Surgery, for instance, has acquired more than 40 smaller businesses.

In Europe, private equity group Nordic Capital bought veterinarian services company AniCura and grew the number of clinics four times in four years before selling to Mars, the pet food to chocolate conglomerate.

The €2bn deal delivered seven times return on investment for the buyout fund, a person with direct knowledge of the transaction said. 

This comes at a time when private equity groups are increasingly facing competition from each other in a booming market as well as deep-pocketed corporations and new rivals such as family offices and sovereign wealth funds. 

“Private equity groups are thinking about how they compete more effectively and create value,” said Brenda Rainey, a senior practice director at Bain & Company.

“One way is to buy a platform and the argument that a corporate can pay more because of synergies is gone. This way PE can compete head on with corporations.”

She added: “If I can buy a platform and add on small companies that tend to be sold at smaller multiple, I can create something bigger that tends to go for a higher multiple.”

But it is not just growing competition for assets that is encouraging private equity groups to bolt companies together. It is also the pressure to deploy cash as the industry raises a record amount — from CVC’s €16bn to Apollo’s $25bn.

“This is a strategy of the times,” added Ms Rainey.

>>> Hammerson change of control clauses could force asset sales in event of take

Hammerson change of control clauses could force asset sales in event of takeover
30 JUL 2018
Hammerson [LON:HMSO] has change of control clauses that could force the UK-based property company to sell assets in the event of a takeover, The Sunday Times reported. Hammerson disclosed the change of control clause last week, the item said.
The relevant extract from Hammerson’s 1HY18 results announcement of Tuesday, 24 July follows:
"Our Premium Outlet investments, are managed by their founding shareholders, independently financed and have operating metrics which differ from the Group's other sectors. The relevant legal agreements have pre-emption rights in favour of the Group and other owners of VR (Value Retail) and VIA (Via Retail) in the case of transactions of interests in the two businesses. The agreements also contain provisions which are triggered by a change of control of Hammerson plc whereby certain governance, information and liquidity rights held by the Group may be restricted. The management of VR have rights to acquire certain of the Group's investments in VR at market value.”
Hammerson owns minority shareholdings in Value Retail, operator of Bicester Village, a premium discount retail development near Oxford, UK and eight similar outlets including Kildare Village, The Sunday Times article said, adding that Hammerson also holds a minority interest in Via Retail, operator of 11 retail sites in Europe.
According to Hammerson, the change of control clause covers only a “modest” part of its exposure to premium outlets, which represent below 10% of the group’s GBP 6.2bn (EUR 6.97bn) portfolio, the item said.
Value Retail's management would be able to acquire Hammerson's stake in the business for its market value in the event of that Hammerson is acquired by another party, the report continued. A City source cited by the newspaper said the clause could put off potential bidders for Hammerson.
The item noted recent speculation that Hammerson's French rival Klépierre [EPA:LI] might return with a fresh bid in October, having made two bid approaches in spring this year.
Hammerson’s market capitalisation stood at GBP 4.03bn at the close of trading in London on Friday, 27 July.

>>> Barrons weekend summary: positive featured on FB, FCAU Cover story: Barron’s

Barrons weekend summary: positive featured on FB, FCAU
* Cover story: Barron’s partnered with Backend Benchmarking to publish the first ranking of major robo-advisor firms that uses both performance data and qualitative metrics like ease of use and financial-planning capabilities; The top ten firms are Vanguard, Betterment, SigFig, E*Trade, Schwab, Wealthfront, WiseBanyan, Personal Capital, FutureAdvisor, and Acorns.

* Features: 1) The container-leasing business is in the second year of a four-to-five year cycle, with growth coming from replacement containers and increased global shipping volume, says Cowen’s Helane Becker; 2) Positive on FB: Shares of the social site would seem to be a bargain after last week’s drop, especially because the company is a rarity: a megacap with a reasonable valuation whose revenues have 25% upside next year; 3) Positive on FCAU: Despite the death of CEO Sergio Marchionne and mixed quarterly results, analysts expect the automaker to grow earnings faster than U.S. rivals, and shares are 75% cheaper than the broad S&P 500 index; 4) Few companies say they have seen positive effects from Donald Trump’s tariffs, while many cite none, or describe only modest negatives—though it’s ultimately too early to tell what the overall results will be.

* Tech Trader: Most tech companies that remain in their specialized niches will have a hard time adapting to the changing landscape—rather than bending the world according to their vision, as AMZN has done, they remain focused simply on avoiding problems.

* Trader: “Tariffs remain a central concern and an important driver of economic and market action, and they probably affected Q2 GDP by causing exporters to speed up deliveries, particularly of farm products, ahead of the new duties”; A majority of active fund managers beat their benchmarks last year, allowing them to reverse the cash outflows they’ve suffered amid the growth in passive investing; Cautious on LLY: The key question for investors is whether the pharma company’s superior growth is baked into the stock price.

* Interview: Sarat Sethi and Ned Dewees, managing partners at Douglas C. Lane & Associates, are positive on the U.S. economy and consumer, and the potential of big data; Their portfolios don’t include AMZN or NFLX (holdings: ILMN, IAC, MSFT, ORCL, FRC, XPO).

* Profile: Will Muggia, manager of the Touchstone Mid Cap Growth fund, uses a model based on analyst track records that closely monitors each analyst’s contribution to portfolio risk relative to the benchmark (top 10 holdings: WP, PXD, FIS, FLT, JBHT, TRU, TIF, COO, TDY, AME).

* European Trader: Positive on Charter Court Financial Services Group, OneSavings Bank: Firms are the top choices for investors in the British challenger bank sector, says Goodbody analyst John Cronin.

* Emerging Markets: Trade wars and a strong dollar aren’t hitting all emerging markets: Latin America is on a tear, with ETFs covering Brazil, Mexico, and Argentina up during the past month.

* Commodities: Investors shouldn’t expect gold prices to rebound anytime soon “because the strength of the U.S. dollar will keep a lid on any rally and at the very least could push prices for the metal down further.”

* Streetwise: The ongoing closure of newspapers will affect investors because without reporters there will be less information available upon which to base decisions.