Why Australian take-privates are taking off

In the ensuing weeks, the reality of Billabong's muted business prospects hit home and the stock plummeted. The PE firm has now returned to the table with an offer that is lower but not unreasonable. Several shareholders have already signed up to the deal and there is a general expectation that it will go through this time.

The TPG-Billabong situation is instructive in two respects: it is further confirmation that take-private deals are a trend worth watching in Australia; and it is an example of how some founders and management teams are struggling to come to terms with the fact that the market has turned against them, and are losing the confidence of shareholders in the process.

Pacific Equity Partners (PEP) kicked off the take-private spree, securing the A$720 million ($740 million) buyout of cleaning and catering services contractor Spotless at the end of April. Since then we have seen Crescent Capital offer A$220 million for Clearview Wealth and CHAMP Private Equity agree to buy Gerard Lighting Group for A$186 million.

In each case, at the time the offer was made, the stock was trading down on a one-year basis. Individual performance varies, but there are various broader reasons - ranging from overseas institutions pulling out of Australian equities to retail investors shifting their capital into bank deposits - why public valuations might not reflect the full value of a business.

CHAMP Private Equity's bid for Gerard stands out because it received full backing from the board and the family owners. This is often a rarity in Australia when PE investors are involved.

Gordon Merchant, Billabong's founder, irked shareholders by refusing to give much ground to TPG. Peter Smedley, chairman of Spotless, wouldn't allow PEP to conduct due diligence until shareholder criticism made him change his mind. Clearview's board rejected Crescent's offer and advised shareholders to take no action.

Company founders and board members have a duty to obtain the best possible price, but there have been situations in which bluster has been counterproductive. One explanation for these attitudes is that founders are now operating in a market where the tide has turned against them and it is difficult to adjust.

A few years ago, buyout bids were rebuffed by a sense that the market was inexorably rising: shareholders could reject private equity suitors and expect to be rewarded by a higher stock price three months later.

But the withdrawal of overseas institutions left companies with debt to roll over and no certainty as to whether banks would have the appetite to replenish it.

They responded with a frenzy of discounted rights issues - about A$180 billion in equity fresh equity in the space of two years. Investors were sold on the fact that the challenges of 2009 would be short-lived, but that hasn't proved to be the case. It has led to a breakdown in trust between shareholders and management and this makes it very difficult to place a value on future performance.

With the exception of certain market niches, the growth story now carries little weight and this translates into muted public valuations. PE firms, buoyed by still relatively low financing costs for leveraged buyouts, will continue to try and take advantage. Owners and management should be prepared.

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• Topics
• Australasia
• Buyouts
• TPG Capital
• Pacific Equity Partners
• CHAMP Private Equity
• buyout
• Australia