The Lure Of Privacy

After 12 years as a public company, business-travel agency Hogg Robinson recently booked a novel trip for itself: a one-way flight out of the London Stock Exchange. CEO David Radcliffe led a $450 million management buyout of the firm, a move he saw as the best solution to an increasingly common dilemma. Though Hogg Robinson was profitable--it had revenues of $2.63 billion last year--its share price had slumped because investors considered the company too small to offer "exciting double-digit growth," as Radcliffe explains. With a depressed stock price, the company found it hard to grow and make acquisitions. So in May the board agreed to accept management's bid of $4.28 a share, or 57% more than its market price. Radcliffe says the move "reinvigorated" his company, which is now investing in an e-commerce strategy to remain competitive.

Hogg Robinson's decision is part of a surprising trend at a time when start-up companies still dream of going public. Even so, a growing number of European firms--mostly from old-economy sectors--are delisting from stock exchanges. Freed from having to please investors every quarter, many smaller companies find it easier to grow--or reinvent themselves--when they are financed by private-equity funds and banks instead. The buyout firm Kohlberg Kravis Robert recently created a $3 billion European fund and started scouting the Old World for new privatization deals. "There are lots of opportunities here," explains Ned Gilhuly, managing director of KKR's European operations in London. "We believe there will be more, and sizable, deals in Europe." So does London private-equity firm BC Partners, which last month topped KKR by raising a $3.27 billion fund to join the privacy movement.

According to the Centre for Management Buyout Research at the University of Nottingham, there were 45 public-to-private deals in Britain in 1999 worth $6.83 billion, up from 27 worth $3.98 billion in '98. And KPMG Corporate Finance says the growth is continuing; deals during the second quarter of 2000 were worth $8.7 billion, a 334% increase over the first quarter. In Continental Western Europe, the trend is even steeper: 27 deals worth $3.84 billion last year, up from three deals worth $224.3 million in 1998. Significant transactions include KKR's $940.5 million acquisition of British conglomerate Wassall, whose primary holding is Thorn Lighting, a manufacturer of light fixtures; and the $1.4 billion buyout of the German bathroom-fixtures maker Friedrich Grohe, led by BC Partners.

It is the new economy that is driving many firms out of the stock market. As investors, especially institutional investors, focus on big-growth, high-tech stocks, smaller, nontech companies don't show up on the radar, even if they are profitable and growing steadily. Martin Bolland, a partner at Alchemy Partners, a London private-equity investment firm, says that because smaller companies are hard to track, "they are an inefficient way of investing" for fund managers. Of the companies that have gone private, more than 90% are in traditional industries such as paper, textiles, food and water, reckons the University of Nottingham's Mike Wright. "The main motivation is that these companies are not really getting a fair valuation in the market," he says. That's a catch-22 for any company unwilling to stagnate. Investors favor bigger companies, but smaller companies with depressed share prices can't do the things needed to grow, like make acquisitions or fund new products and aggressive marketing campaigns.

America's '80s buyout phase mostly bypassed Europe. The main reason: there were fewer European public companies then. It took the IPO movement of the '90s to make going private possible. But what's happening now is no replay of '80s America, Wright insists. That era was marked by hostile bids and huge, massively leveraged deals often financed with high-risk, low-investment-grade junk bonds. Today's deals are rarely hostile, and debt levels are more manageable. Today's mantra is "buy and build." Once a company has been taken private, the idea is to build it up via acquisitions. Banks are often willing to lend to newly private companies, says Steve Russell, HSBC Investment Bank's British strategist, "because they expect the equity funds will keep them fiscally disciplined."

Shareholders generally accept that going private is sometimes the only resort for companies, because many are in sectors that may never rebound. But some share prices are so depressed that even when premiums of 50% to 60% are paid to buy them out, the deals don't fully represent the companies' value.

So what can buyout specialists do with these enterprises once they've been pumped up? Alchemy's Bolland says it's usually easy to sell the revamped companies to bigger competitors. "It's really all about consolidation," he says. And consolidation is good, claim today's buyout barons. They see themselves not as corporate raiders stalking bloated conglomerates but as value hunters salvaging sound companies unloved by today's stock markets.