The collapse of the bid by private equity firm CVC Capital Partners to take Betfair private highlights how it has become increasingly difficult to pull off such deals.
CVC said on Tuesday that it had ended its 1 billion pound ($1.5 billion) attempt to buy the online gambling company after the two failed to agree on price and strategy.
Public-to-private deals, where a company listed on a stock market is bought out by a private buyer, helped to drive the boom in private equity dealmaking in 2006 and 2007.
About half of all private equity mergers and acquisitions (M&A) globally in those years were public-to-private deals, Thomson Reuters data show. Since then, however, the figure has dropped significantly. Last year it was only 12 percent.
Private equity firms are interested in acquiring public companies they view as undervalued by the market and which they believe could improve performance significantly under private ownership.
One of the main benefits of going private is that a company does not have to publish quarterly results. This allows management to take a longer-term view on business strategy because short-term profit falls will not face such intense scrutiny.
Bankers and private equity groups predict some activity this year, though a return to boom times is not expected.
"There are a number of public companies that are not run with the same sort of rigour and pace of a private equity-owned business," said Fred Wakeman, managing partner at Advent International.
In spite of that, he does not expect the volume of public-to-private deals to return to previous levels. "The private equity industry in 2006 and 2007 was a bit of an anomaly," he said.
In those days, bankers were knocking down the doors of private equity groups to offer debt packages to buy public companies. Though bankers say that funding is still available and that they are working on several possible deals, it's a far cry from the free-flowing finance of the golden years.
"Headline-grabbing debt deals are probably not where boards of lending banks are pointing their people to go right now," said Graham Elton, partner at management consultant Bain & Company.
_0">'PUT UP OR SHUT UP'
In the UK, the process was also made less attractive by changes to the takeover rules in 2011. Potential bidders are now named publicly and must comply with a 'put up or shut up' deadline.
Last month CVC was forced to announce that it was considering a bid for Betfair after it was leaked to media. It then had 28 days to make a bid, though the target company can ask for this deadline to be extended.
"Once you are named publicly, that is not an attractive place to be," said Fraser Robson, associate director at private equity company The Carlyle Group.
_4">"If a company is being sold in an auction or structured process, they have done three months of preparatory work to get their long-term business plan and detailed financials in order. When you approach a public company, it is not expecting to be sold and so is unlikely to be prepared for diligence."
_5">Bidders also tend to receive more restricted access to data than when they are in talks with a private company, making it harder to assess the target's future prospects.
_6">"The level of detail is weaker and, because of an underlying caution about the general economy, sponsors have an increased concern that they won't have all their due diligence properly ticked off," Advent's Wakeman said.
_7">The maths can be another sticking point, with takeover buyers generally expected to pay a premium of about 30 percent to the pre-bid share price.
_8">The premium makes it difficult for private equity groups to meet the annual returns they target for their investors. They are also unlikely to benefit from the cost-saving synergies that justify the premium for some corporate buyers.
_9">Then there's the rally in stock markets this year, which has served to make listed targets more expensive.
_10">And if that's not enough obstacles, many companies have spent the past few years reducing their debt, making them less attractive to private equity because the bid premium becomes a higher proportion of enterprise value.
_11">"The stars really have to align, and that makes it quite hard," Carlyle's Robson said. "If you have the choice between two similar opportunities and one is a public-to-private, you are going to spend your time on the other."
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