With the European leveraged loan market having reopened before the Easter break, there is renewed optimism that the pipeline of mandated private equity-backed transactions will be out to syndication soon. And with purchase price multiples falling at the end of the first quarter—alongside slightly lower equity contributions from sponsors and increasing leverage—there is hope that more deals will now get agreed to keep the pipeline well-stocked for the rest of the year.
Despite difficult markets due to ongoing geopolitical risk, so far in 2022 (to April 15), debt funding sponsored buyouts has reached €10.8 billion, according to LCD—which although lower than €13.6 billion on the same measure in 2021, is still higher than any other comparable year-to-date period since 2007 (excluding 2021).
Following the reopening of the syndicated loan market, there has been €3.3 billion of total leveraged loan issuance already so far this month (to April 15) of which €2.7 billion is sponsored, with all of that supply supporting new buyouts. These recent deals out to syndication include the sustainability linked term loan backing Brookfield’s buyout of European slate group Cupa, the term loan backing Triton’s buyout of specialty pharmaceutical group and global provider of management services to healthcare-related industries Clinigen, and the chunky financing for the takeover of Veonet, a pan-European group of ophthalmology clinics, by PAI and OTPP.
Sector spotlight
Seeing two new deals in April from the Healthcare sector is no surprise, as transactions from this segment have dominated recent activity, accounting for a 23.36% share of new sponsored deals in the first quarter of 2022, with Services & Leasing and Computers & Electronics in second and third place, respectively.
Zooming out to look at the 12-month rolling data to the close of the most recent quarter, total sponsored issuance reached €91.7 billion to March 31, which is down from record levels at the end of 2021, when the total was €109.1 billion. Indeed, 2021 finished with the highest sponsored volume and the highest buyout volume seen since 2007.
Meanwhile, total buyout transaction volume in Europe (including both debt and equity sources of funding) totaled €89.7 billion to the end of March. This tally is down from the record level seen at the end of 2021 of €102.6 billion, which again was the highest amount on this measure since 2007.
Sponsors have been able to fund transactions with higher levels of leverage over the last 12 months, with total debt-to-EBITDA multiples rising to 5.94x, up from 5.82x on the same measure at the end of 2021. Again, this is the highest such level since 2007.
At the same time, average equity cheques (as a percentage of total sources) fell slightly to 45.8% over the last 12 months, from 46.6% at the end of 2021 and a 10-year peak of 51.6% in 2020. Another financing trend for sponsors is the increasing prevalence of bond issuance in their deals—to the end of the first quarter, bond-only-funded transactions grew to a 23.5% share of deals, which is the highest level since LCD began tracking this data.
Supermarket sweep
The high-yield bond market’s appetite for such buyout debt will be tested shortly with the jumbo bond and loan package funding the buyout of U.K. supermarket group Morrisons by CD&R, which bankers are expecting as early as next week.
The financing will have a capital structure consisting of £5.6 billion in secured and unsecured debt, £1.3 billion of preferred equity and roughly £2 billion of ordinary equity, according to S&P Global Ratings. Of the debt, a £1.2 billion junior secured tranche was placed to Canada Pension Plan Investment Board in February, with a 6.5% coupon and an OID of roughly five points, according to sources.
The percentage share of these types of buyout transactions—namely public-to-private deals—has risen to 20% of deals in the first quarter of 2022, from 11% in 2021. This trend could gain more momentum if a deal materializes from KKR’s pursuit of Telecom Italia (TIM). The deal was first mooted in 2021 and could value the telco at up to €33 billion including debt, easily ranking as Europe’s largest-ever buyout, even if KKR ends up paying a lower purchase price.
TIM has decided against opening its books to KKR, thereby making a full buyout unlikely in the near term. However, the operator has left the door open to private equity involvement as it continues to investigate the separation of its network division. Looking at the broader market meanwhile, the share of corporate spin-offs—such as the deals seen for Scientific Games Lottery and ARMOR-IMAK—has increased so far this year to 30% from 23%, while the share of secondary buyouts and family-owned/other buyouts have both dropped. Meanwhile, P2Ps and corporate divestitures may be fuelled by a rationalization of some of the sky-high purchase price multiples the market saw in 2020, with data tracked by LCD showing such multiples have eased over the last 12 months to an average of 11.47x, compared to 12.34x at the end of 2020.
“We are currently in the land of limbo and there is a mismatch between what private equity are willing to pay and what sellers are willing to accept,” says Jeremy Ghose, managing partner and CEO of Investcorp Credit Management. “Will this last forever? No—the wall of dry powder that private equity is sitting on is still at one of its highest levels. When you have that wall of money, it generally finds a home in the end.”
TIM is not the only telco deal under discussion, either, with a potential €6 billion debt raise that could follow sponsor-backed MasMovil’s tie-up with Orange’s Spanish business, according to reports. The duo said they were in negotiations to create an equal joint venture on March 8, in a deal valued at €19.6 billion. There is also a potential take-private from the bidding for London-listed educational publisher Pearson. The company has said it had rejected two bids from Apollo, the most recent of which valued the group at 854.2 pence per share, up from an initial approach of 800 pence. This latest bid would value the group at £6.5 billion and represent the largest sponsor-backed take-private of a European corporate since Morrisons last year.
Note of caution
That all said, bankers caution that volatile and uncertain markets have brought signs of reticence from buyers, which are slowing or even pausing some situations. In the wider corporate world earlier this month, for example, U.K.-based Spectrus walked away from talks to acquire smaller precision-equipment maker Oxford Instruments, blaming uncertainty resulting from the crisis in Ukraine. The deal was set to value the target at £1.8 billion.
Sources agree, noting there are signs of a disconnect in valuations for buyers and sellers, meaning the year could bring a slowdown in secondary buyouts. This could limit exit opportunities as well given the IPO market remains shallow, notwithstanding the post-invasion equity recovery. “Private equity isn’t selling because they aren’t happy with valuations,” said one underwriter.
Bain and CVC, meanwhile, opted against a bid for Boots by the first-round deadline in Walgreens’ auction of the British chain of chemists, according to reports that first appeared on Sky News. Bidders including Apollo and owners of British supermarket group ASDA—namely the Issa brothers and TDR—remain in the process.
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