03/07/2007 - 22:00

Private equity hits a speed bump

03/07/2007 - 22:00

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Private equity investors have played a major role in some of Western Australia’s biggest takeovers of the past year, although contrary to popular commentary, private equity is not new to the WA market.

Private equity hits a speed bump

Private equity investors have played a major role in some of Western Australia’s biggest takeovers of the past year, although contrary to popular commentary, private equity is not new to the WA market.

The takeover deals of the past year have highlighted the blurred lines between private equity and other sources of money.

Recent developments have also signalled that private equity investors may struggle to maintain their competitive edge.

The big news this week was Wesfarmers Ltd’s decision to proceed on its own with a $20 billion bid for Coles Group Ltd, after its private equity partners pulled out of the deal.

Australian private equity fund Pacific Equity Partners, European fund Permira and Macquarie Bank Ltd withdrew from the Wesfarmers consortium after their borrowing costs were adversely affected by a tightening of global credit markets.

The same problem hit US private equity fund TPG, which had been planning to lodge a competing bid for Coles.

The ability of private equity funds to use long-term debt finance has been their main competitive edge over public companies, which traditionally adopt more conservative funding strategies.

The reliance of private equity on debt finance may become its Achilles heel.

Macquarie Bank is a public company listed on the Australian Securities Exchange but its willingness to use innovative funding strategies means it is more akin to a private equity player.

This was illustrated by its involvement in the bidding war for energy company Alinta Ltd, in which it was outbid by another aggressive and innovative investment banking group, Babcock & Brown Ltd.

Babcock has completed three of the biggest and most innovative deals in WA during the past 18 months.

As well as winning the $8 billion bidding war for Alinta (subject to shareholder approval), it has also invested an estimated $300 million to become a major shareholder in Gordon Martin’s Coogee Resources Ltd.

Coogee had intended to raise money by completing a public share offer and ASX listing, but scrapped those plans when institutional investors demanded more generous pricing.

Babcock’s third big deal in WA was its $853 million acquisition early last year of the WestNet Rail business.

Highlighting Babcock’s creative approach, it subsequently sold 51 per cent of WestNet Rail to an associated company, Babcock & Brown Infrastructure Ltd, and the balance to a Babcock-managed private equity syndicate.

The fight for control of Consolidated Minerals Ltd has pitted a private equity consortium, led by Brian Gilbertson’s Pallinghurst Resources Fund LP, against a public company, the Michael Kiernan-chaired Territory Resources Ltd.

Resource Capital Fund, Quadrant Private Equity and Navis Investment Partners are more traditional private equity funds that have been active in WA.

RCF led a consortium of four global investment funds that bid successfully for Sons of Gwalia’s tantalum mining business.

The consortium has agreed to pay $205 million for the assets, which effectively brings an end to the break-up of the Gwalia business.

RCF’s last high-profile deal in WA was in 2004, when it won control of struggling gold miner St Barbara Mines Ltd, which has since passed into new hands and is prospering.

Quadrant funded a classic management buy-out of Australian Fast Foods Pty Ltd, which owns the Red Rooster and Chicken Treat brands.

Under the $180 million deal, Quadrant will be the majority shareholder while AFF’s management team, led by chief executive and former part-owner Frank Romano, acquired a minority stake.

The transaction was effectively a mechanism for the company’s previous owners, led by former chairman Nick Tana, to sell their stake in the business.

It also gave AFF additional financial firepower to continue the national expansion of the business ahead of a likely stock market listing in three to four years.

Ernst & Young partner Mike Anghie, who was lead adviser, said the transaction meant that AFF was extremely well positioned to continue its rapid expansion and build on the solid platform created by the founding shareholders.

Another fast-growing WA company looking for extra financial backing was John Wood’s National Lifestyle Villages Pty Ltd, which engaged PricewaterhouseCoopers to help it evaluate the best options.

NLV ended up partnering with Kuala Lumpur-based Navis, which invested $40 million in the business.

One of the challenges for the NLV deal was its integrated business model, which involves property development, infrastructure ownership and property management in a relatively new residential concept.

“This is a prime example of how private equity, from a zero base of knowledge but with an open mind and investment experience, can understand the value of an innovative business model where industry operators can only appreciate their area of focus,” PwC partner Angelo Barrio said.

Navis’ other WA investments include Dome Coffee and Worldwide Online Printing.

Another active private equity investor in WA is AMP Capital Investors, which has acquired an interest in at least eight local companies.

It has housed several investments in a majority owned subsidiary, Jeminex Group, which will be the vehicle for a stock market float.

Perth companies owned by Jeminex include Heatley, industrial packaging firm Network Packaging, electrical product supplier Bri-Tech, and industrial workwear wholesaler Noble Agencies.

While private equity deals have attracted a lot of publicity over recent times, they have been a feature of the Perth business scene for many years.

One of the biggest deals of 2004 was GS Private Equity’s and Pacific Equity Partners’ $450 million acquisition of earthmoving equipment supplier, Emeco International.

Like many private equity investors, they subsequently proceeded with a public share offer and listing of Emeco on the ASX.

WA Business News has recorded more than 20 substantial private equity transactions in WA over the past three years, by groups including ANZ Capital, Mizuho International, Stark Investments, Harmony Capital Partners, Perpetual Investment Management and Souls Private Equity.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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