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Public-private market eyed

Private equity funds are targeting the potential upsurge in public-to-private transactions. Mark Beyer reports.

PRIVATE equity funds are eyeing a potential upsurge in public-to-private transactions by Australian companies as a new growth area.

Fund managers believe the protracted weakness in the stock-market will increasingly prompt smaller ASX-listed companies to question the value of remaining listed.

“We have definitely seen in-creased interest,” private equity fund manager Foundation Capital director Mark Dutton said.

His experience is matched by many other investors and corporate advisers around Perth, who point to the rapid growth in the number of public to private transactions in the UK over the past five to six years as a guide to what may occur here.

“Once a few deals were done, they started coming through pretty quickly,” Mr Dutton said.

Local market observers point to three Australian examples of companies going from public to private. People with better corporate memories may recall a fourth transaction that did not go according to plan.

In 2001, Gresham Private Equity planned a management buyout of Perth-based mining services company Scientific Services.

But Gresham’s offer was gazump-ed by Swiss giant Societe Generale de Surveillance, which offered a substantially higher price and gained control of the business.

This episode highlighted the lack of certainty surrounding public company transactions.

Gresham Partners director Michael Ashforth said he believed this lack of certainty tends to discourage private equity funds from pursuing public to private transactions.

He contrasted the vagaries of public company takeovers with the relative certainty of other transactions traditionally supported by private equity funds, such as management buyouts and provision of growth capital.

“In these cases, they can negotiate exclusively with the management team and board to review, structure and complete an acquisition free of the constraints and completion risks associated with a takeover offer or scheme of arrangement,” Mr Ash-forth said.

“Private equity funds also need to make sure they get full control.

“Their transactions are usually leveraged with a combination of equity and debt.

“Without 100 per cent control they cannot get access to the cash flow and may find it more difficult to provide the same incentives to management.”

Mr Dutton takes a different slant on the uncertainty argument, suggesting this may encourage public companies to delist.

“If you are a public company looking to raise capital, there is no guarantee that the markets will deliver,” he said.

“Whereas if you are dealing with a single private equity fund, there is more certainty.

“The increasingly strict corporate governance requirements and the compliance costs facing listed companies provide another incentive to delist.”

Mr Dutton said another driver of public to private transactions could be the increased amount of money in the private equity sector.

At December last year, there were 141 private equity funds managing about $9 billion, double the amount from four years earlier.

Mr Dutton said the weakness in equity markets meant that valuations of listed companies were now on a par with the valuations of private companies.

PricewaterhouseCoopers head of corporate finance and investment banking Angel Barrio is wary about the number of public to private transactions likely to eventuate.

“In a falling market, people will question why they listed,” Mr Barrio said.

“You need to bear in mind that many companies that float seem to do so for the wrong reasons and it may make sense for them to privatise.

“The main reason to float should be to gain access to the capital markets.

“If you are a growing business, or even a mature business with sustainable earnings, you should still be able to raise funds as a public company at a better price.

”If not, it may be that private equity funds offer a better alternative.”

Mr Ashforth suggested the UK experience would not necessarily apply in Australia.

One important difference was that institutions, which dominated the share register of smaller companies in the UK, were often in favour of delisting.

Sceptical retail investors in Australia may need more convincing.

The legal environment in the UK also meant that private equity funds could pursue public to private transactions with much greater certainty than would apply locally.

“In the UK, an offerer can obtain binding undertakings from key shareholders to accept an offer before it is announced,” Mr Ashforth said. 

“This provides much greater certainty for the private equity buyer about the outcome.

“No doubt we will see further public to private transactions but I suspect that these will involve special circumstances such as a controlling shareholder wanting to exit the company.”

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