To float or not to float? Well, if that truly is the question, why not keep your exit options open?
Back in the days of plenty, when private equity firms had a real choice, such Hamlet-like indecision could be dressed up as clever strategy. The dual-track approach became common industry practice. When the time came to exit a portfolio company, the general partner would call in an adviser to review its options and start an auction process, while a separate set of banks and brokers would prepare an initial public offering. Because a sweet pot of fees rested on the outcome, the competition was worthwhile for sponsor and adviser alike.
Now the dual track is back. It's not for everyone, though, and it may not always be a sign of shareholder muscle.
The one that seems to have worked best in recent months was Bridgepoint Capital Ltd.'s tail-wagging exit from pet accessories retailer Pets at Home Ltd. Bridgepoint ultimately agreed to sell the company to Kohlberg Kravis Roberts & Co. for £955 million ($1.52 billion), making 8 times its money and grooming the company so well that the PE shop's banks came through and stumped up a pedigreed 5 times Ebitda of debt to finance the buyout.
As recently as early January, when Pets at Home brought in Goldman, Sachs & Co. and Royal Bank of Scotland Group plc as joint bookrunners alongside the existing global coordinator, bookrunner and sponsor, J.P. Morgan Cazenove Ltd., a flotation had still seemed a viable option. Maybe Bridgepoint only ever meant to use the IPO to inject tension into the auction process. But by that time, the bidding war had already elicited offers of more than £800 million -- so an even meatier market capitalization would have been the target for KKR to beat.
Kabel Deutschland GmbH, a German cable TV operator owned by Providence Equity Partners LLC, is also pursuing a dual-track strategy, preparing for an IPO on the Frankfurt exchange while looking for a hefty €5 billion ($7 billion) in an auction.
Although either scenario would be very ambitious, a sale would be preferable for the sponsor, as it would get the company off its hands at a profit on its reported €650 million equity investment of at least 200%. An IPO, which would raise money to pay down debt, might be better for the underlying company.
Much depends on the ability of any buyer to finance what would be the world's largest buyout in more than two years with what would likely involve loans and high-yield bonds to the tune of €3.5 billion or more.
According to Reuters, stapled financing is already in place. But if the winning bidder cannot ultimately persuade the banks to put up that kind of money, will institutional investors be any more willing to put money on the line in an IPO?
The shakiness of the IPO market became evident on Feb. 4, when Taminco NV, a Belgian functional chemicals producer owned by CVC Capital Partners Ltd., pulled its planned IPO. It had announced a price range of €11 to €14 a share for a listing on the Euronext Brussels exchange, which it had hoped would raise between €370.6 million and €421.5 million. CVC aimed to cash out around €250 million of its stake, but the proverbial "unfavorable market conditions" put those plans on indefinite hold.
But the example of British value fashion retailer New Look Retailers Ltd. shows that an IPO may sometimes be the only chance for a healthy company to shake off its private equity investors and the legacy of their buyout debt. The company announced its intention to float on Feb. 2. Despite the pro forma statement by its CEO that any alternative offer would be considered, sources insisted the IPO was really the only serious option. A successful flotation would slash debt from more than £1 billion to £450 million, clear away expensive junior debt and leave New Look the breathing space to grow.
Apax Partners and consortium partner Permira Advisers Ltd., which own 55% of the company between them, have already made a return through previous recapitalizations. They are under no pressure to force founder and co-investor Tom Singh to seek a sale and will offer only a limited number of their own shares into the IPO. They will not achieve a profitable exit at this stage and will now be diluted to well below a controlling stake in the company. But from their point of view, a diminished share in a healthy company must be better than a debt-for- equity swap that puts the banks at the helm.