High valuations and large deal sizes led to a boom in private equity-led consortium deals across Europe. Not only were firms teaming up with other established sponsors, they were increasingly partnering with powerful sovereign wealth funds and pension funds. While the fallout from COVID-19 has inevitably led to disruption to mega-deals over the short term, we expect consortium deals to continue in the long run as the pressure driving corporate carve-outs shows no signs of dissipating.
A New High Watermark
The sale of Thyssenkrupp’s elevators business to a consortium comprised of private equity firms Advent International and Cinven, alongside Germany’s RAG Foundation and others, is a high watermark for European buyouts. At a reported €17bn (GBP14.6bn), it is the largest leveraged buyout ever agreed in Europe. But the deal is by no means unique. Rather, it is the latest in a string of multi-billion euro consortium buyouts, including EQT and Canada’s PSP Investments’ purchase of Nestlé’s Skin Health business last year, and Carlyle and GIC’s investment in AzkoNobel’s specialty chemicals unit in 2018.
Besides their notably large cheque-sizes, these investments also reflect the “full” prices currently being paid for buyouts. While European median deal multiples dipped to 9.2x in 2019 from 11.0x a year earlier according to PitchBook1, the most competitive and attractive deals can command significantly higher valuations. Provisional deal activity in Europe softened only slightly from the 2018 peak to €453.5bn last year2. Against a competitive backdrop, sponsors are teaming up with partners to spread exposure and mitigate equity risks on the largest transactions.
The impetus for consortium deals is not only on the demand side, however. “Public-to-private” (P2P) transactions and corporate carve-outs have always been the source of the largest buyouts. Shareholders that feel the companies they back are undervalued by the public markets have proved willing to accept private equity offers, resulting in a strong run of deals, particularly in the UK with the consortium buyouts of Inmarsat and Merlin Entertainments, among others. In addition, in this age of investor activism, pressure on boards to streamline operations is high, in turn pushing more companies to offload non-core divisions to focus the business and achieve higher valuations. Europe, with its profusion of large international conglomerates, is – and will remain – a fertile hunting ground for private equity.
Picking the Right Partners
Before the 2007-2008 financial crisis, large consortiums of private equity firms frequently clubbed together to pursue investments. No fewer than five firms delisted Danish telecoms company TDC in 2005, while in the following year six groups agreed the buyout of Dutch information and media group VNU. Today, firms team up with peers with whom they have a strong existing relationship, as well as similar views on operational improvement. Nevertheless, detailed pre-transaction agreements are crucial to put issues like bid negotiation, syndication rights, fees and expenses, and consortium admission and withdrawal rights, as well as, critically, post-closing governance, beyond doubt.
The carve-outs from Thyssenkrupp, Nestlé and AzkoNobel demonstrate a clear shift towards a new kind of consortium, however. Often, they involve one or two private equity sponsors, together with sovereign wealth funds, public pension funds and other private investors assuming roles as “co-sponsor”, “co-underwriter” or “lead co-investor”. The number of active players at the table, not to mention the number of strata within a consortium and co-investment structure, raise many issues for private equity firms and their partners.
Today’s consortium deals reflect the symbiotic relationship between private equity firms and institutional investors. If firms want to retain the financial backing of SWFs and pension funds to allow them to access the highest value transactions, they will need to accommodate the demands of increasingly engaged and powerful partners.
Michael J. Preston
1. Source: Page 6,-Pitchbook European Breakdown
2. Source: Page 3,-Pitchbook European Breakdown