The Fixer-Uppers
JOHN MUSE IS A LANKY TEXAN, but these days he's roaming Europe. He spends the early part of each week flying around the Continent--Munich, Paris, Milan--shopping for companies that might benefit from some U.S.-style strategic thinking. After a few days of talks with potential sellers, Muse returns to his new home in London, where he and his family have lived for six months, to reflect. ""Europe will be a very exciting place for the next five years,'' says Muse, a slight drawl in his voice. ""There has been a lot of merger-and-acquisition activity, and the pace will accelerate. A lot of companies will be available.''
Provided, of course, you've got a billion or so dollars in your pocket. Muse--a 47-year-old partner with Hicks, Muse, Tate & Furst, the U.S. leveraged-buyout firm--definitely does. Fans of Wall Street and the Roaring '80s will remember LBOs: they're those nifty deals in which a relatively modest up-front equity investment can be parlayed (with the help of considerable debt and the participation of top management) into a major corporate takeover. The idea is to ""add value'' to the target company--by cutting costs and engineering expansion--and then sell out at a hefty profit after a few years. U.S. buyout specialists have been doing it in the States for years. Now half a dozen of them, including heavyweights Kohlberg Kravis Roberts (KKR) and Clayton Dubilier, are dramatically stepping up their activities in Europe. British LBO firms are equally enthusiastic.
And why wouldn't they be? The coming of the single currency has turned Euroland into a paradise for takeover artists. There are too many companies in a region that, its borders fading, is getting smaller. Big conglomerates want to slim down to fighting weight, so they're choosing key businesses and selling off the rest. Siemens alone plans to sell, spin off or otherwise divest itself of $10 billion in corporate assets. Midsize family firms, many facing succession issues, are also selling out. Megadeals like the 1997 merger of Guinness and Grand Metropolitan turn heads in Paris and London. But the real European restructuring is taking place in less glamorous industrial cities, where hundreds of vital (but, frankly, dull) companies--auto-parts distributors, insurance firms, sanitation-equipment suppliers--are changing hands at a record pace. Last fall's financial crisis slowed the pace of LBOs, but the market won't stay quiet for long. There's just too much money around. According to Hugh Briggs, a vice president of Salomon Smith Barney in London, U.S. and European private-equity firms have raised some $40 billion for buyouts over the past two years.
British buyout specialists started surfing this restructuring wave a few years ago. But the Yanks are roaring in and taking the game to a new level. Both Hicks, Muse and KKR are busily putting together $1 billion to $3 billion European-investment funds. Last summer Hicks, Muse bought Britain's Glass's group, an automotive-information services firm that the Texans believe will be a good anchor for Continental expansion. Muse says he's eying at least four new acquisitions in the billion-dollar range. Last year KKR led a group that bought Willis Corroon, one of the world's largest insurance brokerages, for $1.5 billion. It was among the year's biggest deals.
Unlike some of Wall Street's notorious deals of the 1980s, Euro-buyouts tend to be about growth rather than asset sell-offs. ""Our strategy is geared to building Pan-European businesses,'' says Mike Smith, the chairman of CVS Capital Partners, a London-based investment group that did 18 European deals last year and has just raised more than $3 billion in venture capital for new buyouts. ""If you're a European food company, you may be a player in your domestic market. But now the ethos is to be a dominant player in all of Europe.'' Adds Steven Galante, editor of the U.S. newsletter Private Equity Analyst, ""Europe is 10 years behind America when it comes to consolidating its industries.''
The buyout specialists are working to close that gap in a hurry. According to Briggs, there were 137 buyout deals in Europe in 1994, valued at roughly $5.6 billion. In 1997 there were 278 deals, valued at $30 billion. And last year the numbers were greater still. This year the buyout game could really sizzle as the euro helps deepen Euroland's capital markets. U.S.-style junk bonds--risky but high-yielding securities--will make it easier to finance the deals. And a burgeoning stock market will make it easier for the investors to sell out and take their profits after three to seven years. ""There are more players, larger buyout funds, and everyone is looking to do bigger deals,'' says Briggs.
Until recently, the European buyout business was largely confined to Britain. But now half of all LBOs involve firms based on the Continent. The region has huge potential, but it's also got plenty of potholes that can trip up overzealous outsiders. The biggest is cultural. For all the talk of a single market, local sensitivities still play a surpassing role in whether a company is sold or not, and to whom. Buyers must be patient, says Mike Wright, director of Nottingham University's Centre for Buyout Management. ""Try a hard sell,'' says Wright, ""and the shutters will come down.''
A pathbreaking deal in France shows how complicated things can get. In 1997 Generale des Eaux, one of the country's biggest conglomerates, decided to sell its health-care business, Generale de Sante (CGS). A nervous buzz began when it became clear that the strongest bidder for CGS, which is France's largest private hospital group, were some high-finance types from across the Channel. When the auction was completed, a British private-equity firm named Cinven became the new owner of CGS, paying $1.8 billion for both it and a U.K. hospital group also owned by the French company. Simon Rowlands, a Cinven director who negotiated the deal, says that during his talks with Generale des Eaux, the expression ""barbarians at the gate''--a reference to the U.S. book about corporate greed and the ruthless tactics of LBO firms in the 1980s--was mentioned ""repeatedly.'' So, before selling CGS, Generale des Eaux (now called Vivendi) asked Cinven to fully explain its intentions.
Cinven laid out its agenda. The British firm would invest heavily in the French hospital group--more than $170 million--to consolidate a disparate collection of hospitals and clinics. It vowed to improve efficiency, but not to reduce the labor force systemically. And it offered CGS's top management a major carrot: an ownership stake in the new company in exchange for a personal investment. To help ""preserve CGS's national identity,'' Cinven asked French companies, including Generale des Eaux, to hang on to a portion of the company. (They agreed: French firms and management now own almost 40 percent of CGS.) The French were satisfied; the deal was signed. Eighteen months later Rowlands says that CGS's financial performance has been good. ""We're happy. Management has embraced the absolute importance of delivering value to us, the shareholders.''
For all their notoriety, U.S. firms seem to be getting on well with most of their European partners. KKR (which, of course, featured prominently in ""Barbarians at the Gate'') recently bought the Reed Regional newspaper group in the United Kingdom from Reed Elsevier Co. The company changed its name to Newsquest, then turned around and bought Westminster Press, another U.K. regional-newspaper chain. With 180 titles, Newsquest is now the largest regional-newspaper publisher in Britain. The firm was taken public, successfully, last year. ""It's been a very happy partnership with KKR,'' says Jim Brown, executive chairman of Newsquest, who along with three other executives took a 3 percent stake in the company at the time of the buyout. ""We didn't want somebody to come in and destroy the company,'' says Brown, ""and we asked KKR, "What's in it for us?' They made it attractive; they made us pretty wealthy people.'' Says Ned Gilhuly, who runs KKR's London office: ""Management behaves differently when they are owners.''
In the United States, buyout firms often rely on layoffs to boost the productivity of their partner companies. But mass firings are a political no-no on the Continent. What do to? LBO firms are getting creative. Some have raised their bids for an industrial division if the parent company agrees to keep a certain number of employees on its own books. Last year one of CVC's partners, Cartiere del Garda, a leading Italian manufacturer of coated paper, bought Smurfit Condat, another paper producer based in the tiny town of St-Lazare, France. Condat has 900 workers--200 more than it needs, according to Ronald Singer, who heads Garda and Condat. But rather than fire them, Garda is investing about $150 million in the Condat factory to raise its output.
Not all the LBOs will have happy endings, of course. Some are already performing poorly, especially in the retail sector, and global jitters may yet undermine more. But with Euroland in the throes of transition, and tens of billions of dollars available to the buyout mavens, John Muse and his like are going to be buying lots of companies in the next few years. ""I'm pretty amazed at the pace of change,'' he says. So is everybody.
