Private equity is back. After going quiet when the GFC dried up the flow of debt, private equity firms have reloaded with fresh capital from investors and are apparently storming the Australian market, hunting for bargains.
As Madeleine Heffernan explained yesterday, retail, pubs, mining services businesses and even marinas are on the target list. And right now, we’ve got a couple of major private-equity driven tussles underway.
KKR’s potential bid for Pacific Brands is still very much in its preliminary stages, but there is plenty of heat in the battle for control of cleaning and catering group Spotless.
Private Equity Partners (better known as PEP) has a bid worth $2.68 a share on the table, representing a purchase price of $711 million.
But this week the Spotless board rejected that bid, with chairman Peter Smedley saying the board unanimously backs the PEP tilt but will only allow the private equity firm to start due diligence if it increases its bid to $2.80 a share.
The reactions to this unusual tactics have been fascinating.
PEP says Spotless hasn’t shown it anything that would justify increasing its bid just for the right to have a closer look at the company’s books.
Spotless Group’s institutional shareholders have reacted angrily, saying Smedley should get out of the way, allow due diligence to start and then try to get a higher price from PEP. Some have threatened to orchestrate an extraordinary general meeting for force the board out.
But Smedley is standing firm, insisting that by setting a price tag he has created “certainty” in the bidding process.
As institutional investors have pointed out, it seems a little silly that the takeover process has been stalled over about $30 million.
On the one hand you could ask whether Spotless Group, whose shares sit at $2.39 at the time of writing, can really afford to risk annoying such a willing suitor.
On the other, you could ask why PEP couldn’t just dip into its pockets and make this problem go away.
It’s unclear how the impasse will resolve itself, but it will be fascinating to watch.
Private equity firms are clearly moving now to take advantage of depressed asset prices and believe they can get assets in the cheap and then turn them around – the interest in pubs, retail and marinas is proof of that.
But they are likely to come up against company owners and directors with a very different view of the world. They remember the pre-GFC days, before concerns about debt and consumer confidence and structural change.
They may know that the asset prices of 2006 and 2007 are long gone, but they are not going to be picked off cheaply now, just because the economy is spluttering a long.
In most cases, you can expect these negotiations to be thrashed out behind closed doors. What Smedley has done is to bring his board’s negotiating position out into the open.
How this little battle turns out will give us some good insights into whether private equity is really just bargain hunting and how deep their pockets are.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
Comments