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Size no matter

25 November 2014 By Olaf Storbeck, Chris Hughes

Private equity’s hunt of large European targets has landed a rare catch. The 3.75 billion euro ($4.7 billion) leveraged buyout of Switzerland’s SIG Combibloc has demonstrated that financial sponsors can still stretch to get a sizeable transaction agreed.

SIG is a classic private equity asset. There’s little glamour to the business, which makes packaging for the food and beverage industry and is the world No. 2 to Tetra Pak. But the company is global, has growth prospects in emerging markets, and demand for its products is reasonably visible. On $2.2 billion of revenue in 2013, SIG made adjusted EBITDA of $543 million, implying a healthy 24 percent EBITDA margin. These dynamics suit private equity’s five- to seven-year investment horizon and its penchant for debt finance.

The vendor, New Zealand packaging giant Reynolds Group Holdings, was able to stage an auction. This was won by Canadian buyout firm Onex but attracted interest from BC Partners and Swiss-based Partners Group. The price equates to an enterprise value to EBITDA multiple of 8.6 times. That does not look outlandish. Onex’s equity cheque was about 27 percent of the purchase price, implying debt on the deal worth about 6.5 times EBITDA.

Deals of this size and leverage have been rare since the LBO boom ended six years ago. Net debt to EBTIDA multiples in European LBOs touched 6.46 times in the third quarter of 2007, and briefly hit 6.7 times earlier this year, according to Thomson Reuters LPC.

The problem is finding the targets. The stock market tends to value large companies with reasonable efficiency, depriving private equity firms of sizeable public-to-private deals. The best opportunities come from disposal programmes launched by some of Europe’s industrial conglomerates. German engineer Siemens recently ditched plans to list its hearing aid unit and instead struck a 2.2 billion euro deal with the Swedish private equity group EQT and Germany’s Struengmann family of entrepreneurs. Buyout firms are also circling the plastics business to be divested by German drugmaker Bayer. That could fetch an estimated 10 billion euros, analysts say.

Could there be more to come? Europe’s macroeconomic outlook remains extremely weak. But buyout firms have sizeable warchests. In Europe alone, private equity has 302 billion euros of capital to put to work, the highest since 2003, according to Preqin. Leverage is clearly available and the appetite for deals is there. That leaves one constraint – short supply of assets.


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