- Boards, shareholders start to rail against lowball bids
- Push for higher premiums compound debt funding dilemma
- Buyer vs seller valuation gaps may take a year to close
LONDON, June 28 (Reuters) – European listed companies have not been this cheap for more than a decade, yet for private equity firms looking to put their cash piles to work, costlier financing and stronger resistance from businesses are complicating dealmaking.Sharp falls in the value of the euro and sterling coupled with the deepest trading discounts of European stocks versus global peers seen since March 2009, have fuelled a surge in take-private interest from cash-rich buyout firms.Private equity-led bids for listed companies in Europe hit a record $73 billion in the first six months of this year to date, more than double volumes of $35 billion in the same period last year and representing 37% of overall private equity buyouts in the region, according to Dealogic data.Register now for FREE unlimited access to Reuters.comThat contrasts with a sharp slowdown in overall M&A activity around the world. But as take-private target companies and their shareholders are increasingly bristling against cheap punts which they say fail to reflect fair value of their underlying businesses in 2022, prospects for deals in the second half of the year look less promising.Leading the first half bonanza was a 58 billion euro ($61.38 billion) take-private bid by the Benetton family and U.S. buyout fund Blackstone (BX.N) for Italian infrastructure group Atlantia (ATL.MI).Dealmakers, however, say the vast majority of take-private initiatives are not reflected in official data as many private equity attempts to buy listed companies have gone undetected with boardrooms shooting down takeover approaches before any firm bid has even been launched.”In theory it’s the right time to look at take-privates as valuations are dropping. But the execution risk is high, particularly in cases where the largest shareholder holds less than 10%,” said Chris Mogge, a partner at European buyout fund BC Partners.Other recent private equity swoops include a 1.6 billion pound ($1.97 billion) bid by a consortium of Astorg Asset Management and Epiris for Euromoney (ERM.L) which valued the FTSE 250-listed financial publisher at a 34% premium after four previous offers were rebuffed by its board. read more Also capturing the attention of private equity in recent weeks were power generating firm ContourGlobal (GLO.L), British waste-management specialist Biffa (BIFF.L) and bus and rail operator FirstGroup (FGP.L), with the latter rejecting the takeover approach. read more Trevor Green, head of UK equities at Aviva Investors (AV.L), said his team was stepping up engagement with company executives to thwart lowball bids, with unwelcome approaches from private equity made more likely in view of currency volatility.War in Europe, soaring energy prices and stagflation concerns have hit the euro and the British pound hard, with the former falling around 7% and the latter by 10% against the U.S. dollar this year.”We know this kind of currency movement encourages activity, and where there’s scope for a deal, shareholders will be rightly pushing for higher premiums to reflect that,” Green said.SUBDUED SPENDINGGlobally, private equity activity has eased after a record year in 2021, hit by raging inflation, recession fears and the rising cost of capital. Overall volumes fell 19% to $674 billion in the first half of the year, according to Dealogic data.Dealmaking across the board, including private equity deals, dropped 25.5% in the second quarter of this year from a year earlier to $1 trillion, according to Dealogic data. read more Buyout funds have played a major role in sustaining global M&A activity this year, generating transactions worth $405 billion in the second quarter.But as valuation disputes intensify, concerns sparked by rising costs of debt have prevented firms from pulling off deals for their preferred listed targets in recent months.Private equity firms including KKR, EQT and CVC Capital Partners ditched attempts to take control of German-listed laboratory supplier Stratec (SBSG.DE) in May due to price differences, three sources said. Stratec, which has a market value of 1.1 billion euros, has the Leistner family as its top shareholder with a 40.5% stake.EQT, KKR and CVC declined to comment. Stratec did not immediately return a request for comment.The risks of highly leveraged corporate takeovers have increased with financing becoming more expensive, leaving some buyers struggling to make the numbers on deals stack up, sources said.Meanwhile, piles of cash that private equity firms have raised to invest continue to grow, heaping pressure on partners to consider higher-risk deals structured with more expensive debt.”There is a risk premium for debt, which leads to higher deal costs,” said Marcus Brennecke, global co-head of private equity at EQT (EQT.N).The average yield on euro high yield bonds – typically used to finance leverage buyouts – has surged to 6.77% from 2.815% at the start of the year, according to ICE BofA’s index, and the rising cost of capital has slowed debt issuance sharply. (.MERHE00)As a result, private equity firms have increasingly relied on more expensive private lending funds to finance their deals, four sources said.But as share prices continue to slide, the gap between the premium buyers are willing to offer and sellers’ price expectations remains too wide for many and could take up to a year to narrow, two bankers told Reuters.In the UK, where Dealogic data shows a quarter of all European take-private deals have been struck this year, the average premium paid was 40%, in line with last year, according to data from Peel Hunt.”Getting these deals over the line is harder than it looks. The question really is going to be how much leverage (buyers can secure),” one senior European banker with several top private equity clients told Reuters.($1 = 0.8141 pounds)($1 = 0.9450 euros)Register now for FREE unlimited access to Reuters.comReporting by Joice Alves, Emma-Victoria Farr, Sinead Cruise, additional reporting by Yoruk Bahceli, editing by Pamela Barbaglia and Susan FentonOur Standards: The Thomson Reuters Trust Principles. .
Global aluminium production by power source 2020FROM LOW CARBON…Coal is still the globally dominant source of power for smelting aluminium, reflecting the market dominance of China, which last year accounted for around 58% of world primary output.Within China there has been a rush to swap coal-fired capacity for new plants in hydro-rich Yunnan province but spaces are fast running out and most of the country’s smelters continue to run on captive coal plants or draw energy from coal-based grids.Changing the source of power from fossil fuel to renewables is the fastest way of lowering primary aluminium’s carbon footprint.Outside of China, the rush to go green has been led by those producers with large captive hydro generation capacity.The LMEpassport for ESG accreditation now lists several aluminium producers, including Russia’s Rusal, U.S. operator Century Aluminum (CENX.O), Indonesian producer Asahan Aluminium and smelters in France (Dunkerque) and the United Kingdom (Lochaber).All have disclosed carbon equivalent footprints of 0-4 tonnes per tonne of aluminium, referencing research house CRU’s Emissions Analysis Tool.No-one yet can make it to zero on a commercial basis.The new green aluminium coalition accepts that its 10% purchase commitments for near-zero metal will be dependent on “advanced technologies not yet commercially available”….TO NO CARBONThe collective race to get to zero or near-zero aluminium is already underway, led by ELYSIS, a joint venture between Alcoa and Rio Tinto.It requires the replacement of the carbon anode in the electrolytic smelting process. The anode accounts for 1.9 tonnes of carbon per tonne of aluminium, the largest remaining carbon problem for a renewables-powered smelter, according to Tim Murray, chief executive of Cardinal Virtues Consulting, also presenting at the CRU conference.The anode being trialled in the ELYSIS process results in zero direct emissions, a much longer anode life and 15% lower costs, Alcoa chief operations officer John Slaven told delegates.If the smelter is fed with “green” alumina, the carbon impact falls below 1 tonne per tonne of metal, freight accounting for most of the residue.A processing path to near-zero primary aluminium is starting to take tangible shape.NO GREEN SANCTIONSThere has been concern that aluminium’s race to go green would be abruptly halted by Russia’s invasion of Ukraine and the possible sanctioning of Rusal metal.Rusal is already a major supplier of low-carbon aluminium from its hydro-powered smelters in Siberia and is itself working on inert anode technology.Fortunately for carbon-conscious buyers, the company was already put through the U.S. sanctions process in 2018, resulting in owner Oleg Deripaska (still sanctioned) giving up control of the company.That shields Rusal this time around. So too do memories of the sanctions supply-chain disruption which stretched from Guinean bauxite mines to European automakers.Rusal’s significance as a supplier, particularly to Europe, will only increase as buyers look for low-carbon metal.NO GREEN PREMIUM…YETThe First Movers Coalition is intended to create a decarbonisation tipping-point for individual sectors centred on future purchase commitments.The incentive for suppliers will be a premium for their low-carbon aluminium, according to Trafigura chief executive Jeremy Weir.Such a green premium remains conspicuous by its absence at the primary metal stage of aluminium’s process chain.And it might not appear for long at all, Colin Hamilton, commodities analyst at BMO Capital Markets, told the CRU conference.Rather, a green premium would simply be a “stepping-stone to low-carbon becoming the prime market and anything else sub-prime.”We may not have to wait much longer to find out because the drive to zero-carbon aluminium has just accelerated.The opinions expressed here are those of the author, a columnist for Reuters.Register now for FREE unlimited access to Reuters.com
