Coronavirus & take-privates: Opportunity knocks

Hong Kong’s Hang Seng Index is down 13% since the start of March. Australia’s ASX200, down 26%; Japan’s Nikkei 225, down 14%; Korea’s KOSPI, down 19%; India’s BSE Sensex, down 30%; the Dow Jones Industrial Average, down 21%. These indexes are trading at lows of 3-12 years. Of Asia’s major markets, only China is holding up against the economic impact of the coronavirus, probably due in no small part to policy support.

For long-term investors able to see past short-term dislocations, the value opportunity in public-to-private deals is glaring. Asia’s PE industry has plenty of dry powder. Due diligence is hampered by travel restrictions, but there’s plenty of information in the public domain. So, are buyout firms willing to take a chance on immediate uncertainty in the hope of picking up assets on the cheap? And what price premium would be enough to tempt public shareholders?

When BGH Capital and Pacific Equity Partners (PEP) submitted their bids for Australian cinema and theme park operator Village Roadshow around the start of the year, they envisaged a valuation in the region of A$783 million ($536 million). The stock has since shed two-thirds of its value after Village Roadshow warned of a downturn in business and implanted cost savings. Should BGH and PEP submit final offers, they are likely to be lower than the indicative proposals. But once COVID-19 abates won’t audiences flock to see James Bond and visitors return to the waters of Wet’n’Wild?

New private equity buyout activity has understandably been muted in recent weeks. However, this doesn’t mean transactions are impossible. Leveraged lenders were happy to proceed on deals already well advanced when COVID-19 sent shockwaves through equity and debt markets globally. But the message to borrowers was: if you want the best deal, today would not be the right time to execute.

A similar caution will be carried over to any new opportunities placed in front of them. While lenders are still open for business and reviewing situations, they say there is heightened scrutiny on underwriting. Leverage levels, terms and pricing will not be as attractive as several weeks ago, and there is a high degree of selectivity based on the credibility of the sponsor, the fundamentals of the target business, and the outlook for the industry.

The environment could change dramatically within a matter of days,. Further escalation of COVID-19, notably in Western markets, may dampen sentiment; equally, one private equity firm taking a crack at a public company might spur several others to do the same.

As such identifying trends is a hazardous exercise. Yet the recently proposed privatization of Hong Kong-listed supply chain player Li & Fung by a consortium comprising its founders and warehouse operator GLP may offer a hint of what is to come. This is not a private equity deal, though GLP is owned by PE investors. It is interesting and relevant in a private equity context for appearing to fit into the category of deals that might’ve been done anyway.

Li & Fung’s business, which primarily involves helping US retailers source goods from Asian suppliers, will inevitably be hit by COVID-19. However, the company was already in trouble due to destocking, store closures and bankruptcies in its client base. The goal of becoming nimbler and more digital is still a long way from realization and it might be achieved more easily away from the public markets and with the support of GLP. This is not a deal done in anticipation of a speedy rebound.

It’s possible the whole deal was mapped out weeks before the markets began to slide, although perhaps talks were accelerated as COVID-19 started to impede Chinese supply chains in January. At the same time, announcing a deal priced at a 150% premium to the previous close – versus 90% at the end of February – might have offered some encouragement.

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• Topics
• Buyouts
• Asia
• coronavirus
• covid-19