Private Equity Newsletter – Winter 2014 Edition: It is Time for Public to Private Deals in France for PE Funds
With covenant pressure, softness on business plans and uncertainties on market perspectives, mid-cap listed companies are facing increased downward pressure on their stock prices, luring private equity specialists and strategic buyers to venture into public to private deals (P2P). Over the past two years, P2P deals in France have surged by more than 130%, and corporates are almost three times more active than PE funds in those deals.
Despite high legal thresholds, P2P deals are generally successful in France
In France, the squeeze-out rules demand a 95% threshold to start a mandatory squeeze-out. This has discouraged a number of non-French private equity houses from considering P2P deals in France. Despite this 95% threshold, which is higher than in many other countries, most deals, if adequately prepared, are successful. Indeed, our research shows that 85% of the P2P deals achieve the expected result. Only a few “horror stories” resulted, where PE funds ended up “in the middle of the road” — with only a fraction of the equity but unable to achieve a take private transaction.
As in the United States, minority shareholders and arbitrageurs can attempt to block a deal by acquiring a stake and refusing to tender it. They can also attempt to start a judicial guerilla which is sometimes successful, especially in active jurisdictions like the Paris Courts, where procedures can take a few months before being trialed. The ongoing attempt of Fosun/Ardian to take ClubMed private is a good example of this situation, and the case is currently being processed by Paris Court of Appeals. The case also highlights the need for fair consideration and a robust financing that can withstand the delay of litigation.
Nonetheless, the courts tend to lean towards those initiating P2P and against dissenting shareholders that are viewed as troublemakers if they cannot demonstrate valid business grounds for resisting the deal. For example, the Paris Commercial Court recently ruled in the Radiall case that a hedge fund that held shares for three years and consistently opposed a squeeze-out (because it wanted a higher consideration) should not be accounted for in the floating on which the 95% threshold applies. The court’s rational was that if a shareholder holds a position for more than three years and consistently voted in a certain fashion, then such investor is not acting like typical floating shareholder but as a shareholder with a control intention, and therefore should be disregarded in the calculation of the floating. In this particular case, the fund promptly reallocated shares to avoid being still for the considered period, but the decision will likely put strong pressure against a similar strategy.
The second strong incentive for P2P in France is price
The premiums that are legally required for P2P are relatively low in France. Our research indicates that over the past two years they averaged 19.75% above the discounted cash flows (a generally accepted index for future performance), and 43.20% above the market stock price, which remained consistently depressed during this period. The difference between premium of stock price vs. premium above DCF is a good indicator that the stock market was trading below what it should, according to financial analysis standards.
Certain strategies have proved to be more successful when making a P2P. Simplified tender offers (offre publique d’achat simplifiée) are predominantly used (47.8%) for P2P deals. This indicates that, in France, P2P deals are generally the result of a medium or long term strategy, where the future buyer first acquired a block of at least 50% of the shares or voting rights of the target, and then launched a take private deal.
If you aggregate regular tender offers with simplified tender offers, followed by a separate squeeze-out, then the chances of success are the greatest, compared to deals where buyers included the squeeze out directly in the tender offer/simplified tender offer, which increase the risk of failure.
We believe this is caused by two reasons:
- fairness in consideration is highly scrutinized, and it is better to go through this process once a strong position is established; and
- contrarian investors are more tempted to derail an “all inclusive deal” where the squeeze-out is already contemplated, than in deals where a +5% will not necessarily have an adverse impact on the entire transaction.
Finally, French regulation enables deals to complete fairly quickly, with a typical timeline between the fairness opinion and the tender offer of 75 to 90 days.
There is definitely a window of opportunity for P2P in France.