Why investors are buying up listed companies in droves
Financial investors are returning to the M&A market after months of restraint. The share of private equity firms in deal volume is increasing again. They face fierce competition for acquisition targets and are increasingly willing to acquire even publicly traded companies – or even buy them back from the stock market after a failed IPO, valuing them higher than traditional stock investors. Financial investors are under pressure to invest, as they have trillions of dollars in capital commitments from their investors – $1.1 trillion of "dry powder" is reserved just for buyout deals.
This has also brought public-to-private deals back into fashion. In the past three months, according to data from the news agency Bloomberg, takeover offers totaling about 37 billion euros have been received by publicly traded European companies – many of them from financial investors. Bargain hunters from Blackstone to Cinven are trying to take advantage of the low stock prices.
Delistings of Suse and Synlab
Recent examples in Germany were – after the software companies Suse and Software AG – the compliance software specialist EQS and Europe's largest laboratory operator Synlab from Munich, as well as in Norway, the online classifieds giant Adevinta. All these companies have recently received private equity offers that, according to the management, often do not reflect the long-term value.
So Synlab – once again – is facing a complete takeover by the financial investor and major shareholder Cinven, who wants to buy the shares it does not yet own for 10 euros each. However, this could be challenged by the hedge fund Elliott of the infamous US investor Paul Singer, who has acquired 6.5% of the shares.
What's unique in this case: Cinven had just taken Synlab public in the spring of 2021. The offering price had been 18 euros at that time, valuing the company at around 4 billion euros. Now, the financial investor is offering only 2.2 billion euros. In the first months after the IPO, the stock was in demand, partly due to the laboratory service boom fueled by the Covid-19 pandemic. The price rose to 25 euros in November 2021. However, the stock couldn't sustain that level for long. In March 2023, it temporarily dropped to less than 7 euros. Now, the laboratory operator could soon disappear from the stock market again.
Turning adversity into advantage
The story is similar to the takeover offer by investor EQT for Suse. The software provider had also been taken public in the spring of 2021 before EQT reversed course last August. Meanwhile, the stock has disappeared from the market. The companies cited business problems as the reason for delisting. Like Synlab, the IPO was initially successful. It had risen from the offering price of 30 euros to 44 euros before dropping to around 10 euros in the summer, leading EQT to withdraw the shares from the market for 16 euros.
In the spring of 2021, financial investors took advantage of the IPO hype. Central banks flooded the world with cheap money, and governments around the globe contributed with trillion-dollar stimulus programs to dampen the effects of the pandemic. This pushed many valuations up and enabled expensive IPOs. However, private equity houses found themselves stuck in their investments with falling prices after IPOs that, measured by the post-trading start development, were unsuccessful. With the "Re-Take-Privates", they are now turning adversity into an advantage.
Banks show little appetite for additional risk
Those who took their portfolio companies public at an earlier time are often better off. For example, Permira has earned 5.5 billion euros so far with the software company Teamviewer through the IPO in 2019 and subsequent stock sales. Permira had bought the company for around 900 million euros.
Johannes Lucas, head of M&A consultancy at Stifel Europe Advisory, expects "no special hype around Taking Privates", because "first, interest rates are high, and the usual banks generally have little appetite for additional risk due to their own concerns in the existing credit portfolio," Lucas told the Börsen-Zeitung. "Second, the regulatory environment for takeovers has become even stricter." And third, the required takeover premiums in most cases reduce the perceived economic attractiveness of a Taking Private.
"No wave expected"
Apart from individual cases, where strongly growing, profitable companies, hampered by their historical cap table and today's usually low market capitalization, do not have reasonable access to additional capital, there will probably not be a wave of Taking Privates. "Much more alarming, conversely, is the fact that the German financial center still has not managed to provide a pre-market and via the local market for growth and technology companies a valuation- and volume-wise interesting institutionalized access to venture capital," warns Lucas. "Every Taking Private is essentially a sad proof of the chronically ailing state of our financial center."
Previous Take Privates included the cable network operator Tele Columbus (Morgan Stanley Infrastructure), the pet supply retailer Zooplus (EQT), and the Munich-based traffic technology specialist Schaltbau (Carlyle). The investment hypothesis was usually: the long-term growth strategy can be best pursued in a private ownership structure.
"The private capital market is currently deeper"
According to Alexander Bleck, head of investment banking at Nomura in Germany, the stock market environment is "currently challenging, both for IPOs and for listed, still capital-hungry growth companies": "Today's lower valuations often make traditional equity financing through capital increases unattractive," says Bleck. "There are some listed companies that would not have sought or would have only sought an IPO at a later time from today's perspective." Nomura currently sees ample activity in the Private Placements sector with specialized investors in the fields of infrastructure and energy transition, as well as other sectors that are interesting for impact investments. "Some of the investors active here can also invest in growth companies, that are already listed," says Bleck. "In that sense, Take-Privates from our perspective also reflect the fact that the private capital market is currently deeper in some areas than the public capital market."
In Take-Privates, sometimes exorbitant premiums are paid. At Aareal Bank, which has now completed its delisting, Centerbridge offered a 35% premium on the volume-weighted average price during the last three months. Morgan Stanley added 37.5% to the cable operator Tele Columbus, which narrowly avoided bankruptcy, and Carlyle offered 44% more for Schaltbau. However, EQT leads the pack. The Swedes offered a 69% premium for Zooplus – and even 98% for Va-Q-Tec. On average, Public-to-Private deals, according to Refinitiv, only have a 42% premium.
Valuations in Public-to-Private deals not necessarily overheated
Are valuations in Public-to-Private deals already overheated? Not necessarily. On the one hand, financial investors cannot cite any synergies as a reason for the higher valuation. On the other hand, they often pay lower prices than were called for the same companies before the pandemic. They can afford to have a longer breath than many stock funds in terms of holding duration.
They look beyond the current crisis and can intervene entrepreneurially themselves because they have control in the companies they acquire. They don't have to consider a complicated ownership circle or an uncooperative supervisory board, and they can temporarily forgo dividends to accelerate growth with the retained capital.
Recently, company executives have been more inclined to take the unusual step of not giving their shareholders a recommendation to accept or reject the private equity offers. Instead, they urged them to make their own decision.
Cinven has already secured access to almost 80% of the Synlab shares
The board and supervisory board of Synlab announced in early November that Cinven's offer of 2.2 billion euros was "not appropriate" from a financial perspective. As evidence, they cited two expert opinions that reached the same conclusion. Nevertheless, after talks with other interested parties, "Cinven's offer proved to be the most attractive in the current environment." In addition, they appreciated Cinven's support for Synlab's strategy.
Synlab's board and supervisory board ultimately refrained from any recommendation and concluded that each shareholder "must make their own decision." The executives will tender their own shares.
Cinven holds around 43% of the shares. The transaction is supported by other core shareholders such as Novo Holdings and Ontario Teachers' Pension Plan Board. Synlab founder Bartholomäus Wimmer has also committed to selling 60% of his shares as part of the offer and reinvesting the remaining shares. With this, Cinven has already secured access to almost 80% of the shares, it was announced at the end of September.
Undecided supervisory boards
The independent supervisory boards of the Norwegian classifieds giant Adevinta are currently similarly undecided in the face of an offer from the financial investors Permira and Blackstone amounting to 14 billion euros, including debt. They are convinced that a higher value could be achieved, but the offer still lies "within the range" of what is fair, and some risk-averse investors may want to sell, according to their statement. Since Adevinta's core shareholders – the Norwegian media conglomerate Schibsted and the auction platform eBay – had already reached an agreement with the bidders, the supervisory boards ultimately concluded that there were only limited alternatives and presented the offer to the shareholders.