Private equity firms are boosting the size of merger and acquisition deals, even if the number of transactions falls.
Last year the value of U.S. merger and acquisition deals in which private equity firms were the buyers was $131 billion, up from $116 billion a year earlier, according to Thomson Financial. And the average size of such deals rose to $219 million, up from $171 million in 2003. Private equity firms were buyers on 7% of all M & A; deals last year, down slightly from a year earlier.
“The managers of those (private equity) funds only get paid if they put that money to work and generate returns for investors,” said Charles Ruck, a partner and head of the M & A; group of the Costa Mesa office of Latham & Watkins LLP. “They have a lot of money they weren’t doing anything with for a while. They’ve nowhere near spent the amount of money that they have raised so there are still a ton of deals going on.”
Ruck noted that private equity shops are going after businesses that they never would have considered before, such as the recent billion-dollar offer to buy all the teams in the National Hockey League.
The most notable private equity deal in Orange County in the past few years was the sale of part of Freedom Com-
munications Inc., which operates the Orange County Register, other newspapers, TV stations and media holdings.
In the Freedom deal, a pair of private equity firms, New York-based Blackstone Group LP and Providence Equity Partners Inc. of Rhode Island, invested about $1.3 billion in the company for a minority stake. The deal, which allowed some shareholders to cash out, closed last spring.
Another big deal was the sale of Irvine’s Golden State Foods Inc. by Los Angeles private equity firm Yucaipa Cos. early last year.
Golden State, a major food supplier to McDonald’s Corp. restaurants, was picked up in a management-led buyout by Chief Executive Mark Wetterau, his brother and others.
Golden State is the second-biggest private company in the county with yearly sales of $2 billion. A value wasn’t disclosed in the buyout, but sources put Golden State’s enterprise value,equity and debt,at $500 million to $700 million.
More recently, private equity deals here include last month’s proposed sale of Consolidated Fire Protection LLC in Irvine to San Francisco-based Gryphon Investors. It’s buying the fire safety company from Costa Mesa-based Westar Capital LLC, Los Angeles-based Caltius Private Equity Partners and others for undisclosed terms.
Last year a pair of private equity firms,Frontenac Co. of Chicago and Med Equity Capital of Wellesley, Mass.,bought Crescent Healthcare Inc., an Anaheim-based specialty drug provider.
And the Irvine arm of Westport, Conn.-based private equity investor Compass Group International LLC took a majority stake in Anaheim-based SDC Technologies Inc., which makes a durable clear coating primarily for eyeglass lenses.
Deal sizes are on the upswing because there’s more competition to buy solid companies, said Michael Flynn, a partner and chair of the corporate practice at Newport Beach law firm Stradling, Yocca, Carlson & Rauth.
“There is pent-up demand to put this money to work,” Flynn said. “A number of these funds have pressure to put their money to work.”
Private equity firms continue to attract interest from investors. The Carlyle Group, a Washington, D.C.-based private equity firm that has a stake in Newport Beach-based Jazz Semiconductor Inc., said last week that it raised $7.9 billion from investors for a new fund. It’s the world’s biggest private equity fund, surpassing a fund started by Blackstone Group a few years ago that was $6.5 billion in size.
Some observers say private equity buyers are winning acquisition bids because of a regulatory change.
Sarbanes-Oxley Act’s Section 404 has levied a number of requirements on publicly traded companies. Most onerous is the requirement for public companies to detail and evaluate their financial reporting controls and procedures for annual reports.
When a public buyer acquires a private company, it must comply with Section 404. But a private buyer has no such concerns.
“A lot of public companies are reticent to pursue large acquisitions of private companies for fear they may be inheriting an internal control problem,” said Dan Donahue, a partner in the Irvine office of Seattle law firm Preston, Gates & Ellis LLP. “The implementation of Sarbanes-Oxley is giving private equity groups an advantage, since the 404 issues don’t apply to private buyers. All this is driving up deal costs for public companies looking to make acquisitions.”
Private equity firms are pursuing acquisitions aggressively.
“There are fewer deals than private equity capital out there to be spent,” said Andy Graham, head of the Newport Beach office of Los Angeles investment banking firm Barrington Associates. “We’re getting a lot of calls from our private equity contacts looking to do whatever they can to be the first group to get a look at whatever new deal we’re managing.”
Murray Rudin, an Irvine-based partner with Los Angeles private equity firm Riordan, Lewis & Hadden LLC, said lenders are making debt more available, which also is boosting private equity investing.
“Lenders are providing higher amounts of debt for transactions nowadays, and this makes leveraged-buyout transactions more appealing to private equity groups,” Rudin said. “It motivates them to jump back into the market.”
A leveraged buyout is the acquisition of all or part of a company in a strategy that uses mostly borrowed money.
Looking ahead, observers see more private equity-backed deals.
“We’re seeing one in every four transactions we’re doing is consummated by a private equity firm buying a business,that’s up from one in 10 about five years ago,that trend should continue,” said Coby Sonenshine, president of Costa Mesa investment banking firm RSM EquiCo. “There’s a lot of capital out there chasing relatively few deals. That manifests itself not only with the megadeals like Kmart (which bought Sears), but through middle-market companies, too.”
Sonenshine said RSM is working on a deal where Costa Mesa private equity fund Westar is one of the final bidders. He declined to name the company involved.
