- 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. .
Reuters GraphicsOn Tuesday, stocks shrugged off the rise in yields, with the S&P 500 ending up 1.6% on the day. Still, the S&P 500 is down 6.4% this year, while the yield on the 10-year TIPS has climbed more than 100 basis points.”Real 10-year yields are the risk-free alternative to owning stocks,” said Barry Bannister, chief equity strategist at Stifel. “As real yield rises, at the margin it makes stocks less attractive.”One key factor influenced by yields is the equity risk premium, which measures how much investors expect to be compensated for owning stocks over government bonds.Rising yields have helped result in the measure standing at its lowest level since 2010, Truist Advisory Services said in a note last week.
Reuters GraphicsHEADWIND TO GROWTH SHARESHigher yields in particular dull the allure of companies in technology and other high-growth sectors, with those companies’ cash flows often more weighted in the future and diminished when discounted at higher rates.That may be bad news for the broader market. The heavy presence of tech and other growth stocks in the S&P 500 means the index’s overall expected dividends are weighted in the future at close to their highest level ever, according to BofA Global Research. Five massive, high-growth stocks, for example, now make up 22% of the weight of the S&P 500.At the same time, growth shares in recent years have been highly linked to the movement of real yields.Since 2018, a ratio comparing the performance of the Russell 1000 growth index (.RLG) to its counterpart for value stocks (.RLV) – whose cash flows are more near-term – has had a negative 96% correlation with 10-year real rates, meaning they tend to move in opposite directions from growth stocks, according to Ohsung Kwon, a U.S. equity strategist at BofA Global Research.Rising yields are “a bigger headwind to equities than (they have) been in history,” he said.
Top five stocks market cap as percentage of S&P 500Bannister estimates the S&P 500 could retest its lows of the year, which included a drop in March of 13% from the index’s record high, should the yield on the 10-year TIPS rise to 0.75% and the earnings outlook – a key component of the risk premium – remain unchanged.Lofty valuations also make stocks vulnerable if yields continue rising. Though the tumble in stocks has moderated valuations this year, the S&P 500 still trades at about 19 times forward earnings estimates, compared with a long-term average of 15.5, according to Refinitiv Datastream.“Valuations aren’t great on stocks right now. That means that capital may look at other alternatives to stocks as they become more competitive,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.Still, some investors believe stocks can survive just fine with rising real yields, for now. Real yields were mostly in positive territory over the past decade and ranged as high as 1.17% while the S&P 500 has climbed over 200%.JPMorgan strategists earlier this month estimated that equities could cope with 200 basis points of real yield increases. They advised clients maintain a large equity versus bond overweight.”If bond yield rises continue, they could eventually become a problem for equities,” the bank’s strategists said. “But we believe current real bond yields at around zero are not high enough to materially challenge equities.”Register now for FREE unlimited access to Reuters.com
Atlantia’s share performanceEdizione and Blackstone want to delist Atlantia to shield it from the appetite of rival suitors, who approached the Benettons last month with a proposal to buy the group and hand over Atlantia’s motorway concessions to Perez.GIP, Brookfield and the Spanish tycoon are in a ‘wait and see’ mode after the Benetton family and Atlantia’s long-time investors CRT and GIC rebuffed their offer, sources have said.The takeover offer comes as Atlantia prepares to pocket 8 billion euros from the sale of the group’s Italian motorway unit, a deal aimed at ending a political dispute triggered by the 2018 collapse of a motorway bridge.It also puts the spotlight on Alessandro Benetton, 58, who was appointed chairman of Edizione earlier this year, tightening the family’s grip on its investments.After parting ways with its Autostrade per l’Italia, Atlantia will continue to run airports in Italy and France, motorways in Europe and Latin America and digital toll payment company Telepass.The Italian government so far has been silent on the latest developments, but it has special vetting ‘golden’ powers over strategic assets, such as the country’s airports and their ownership.($1 = 0.9184 euro)Register now for FREE unlimited access to Reuters.com