Is nothing sacred? Scarcely a day goes by without some stalwart of the UK corporate scene being linked to a private-equity (PE) bid. J Sainsbury, Boots, Pearson, Whitbread, EMI—even Unilever, for goodness sake—have all seen their share prices rise in recent weeks on the back of rumoured or actual private-equity interest.
But how many of these deals will actually get done? The answer is probably not too many. Sure, private equity is awash with cash, which it is hungry to put to work. And the superiority of the private-equity model—in terms of governance, management focus and ability to employ leverage—may prove decisive over time.
Even so, public to private buyouts are very tricky to pull off in the UK, compared to the US, where these deals are common. Private equity’s share of UK public takeovers fell last year. The snag is that boards still have the whip hand. Private equity can’t make hostile bids because the banks won’t lend the money unless they’ve seen the books. So, any deal has to come with a board recommendation.
Ironically, this means buyouts of those underperforming companies that could most benefit from being taken private can be the hardest to pull off. Managers who know they will lose their jobs are more likely to dig in their heels. They may even be supported by shareholders frightened of being made to look silly by selling at the bottom. But look at some of the UK companies that saw off bids last year, such as HMV and ITV. How investors must regret missing out now.
Instead, private equity might do better to focus on companies with highly-rated bosses. Such deals can be expensive and create conflicts of interest.
But at least the bosses won’t be worried about losing their jobs. Those in their 40s, in particular, belong to a generation more susceptible to the glamour of cash than the status of running a public company.