Barbarians near the gate as VCs eye corporate Europe

Names such as publisher Reed Elsevier, supermarket chain J Sainsbury, and pub chain Scottish & Newcastle are being touted, among others, as Eu8bn-Eu12bn LBO targets for this autumn.

Venture capitalists and leverage finance bankers have had their appetites whetted by entrepreneur Philip Green?s failed £9bn bid for Marks & Spencer, and are now contemplating buy-outs of publicly traded companies with enterprise values of up to Eu12bn.

?M&S has changed the horizon of what is possible,? said a private equity investor. ?For example, when we look at telecom carriers there doesn?t seem to be a corporate finance impediment anymore.?

Bankers told EuroWeek that they and private equity sponsors are turning their attention to companies within this range of enterprise values ? market cap plus net debt ? whose stock prices have been lagging over the last 12 months.

?Come September or October we fully expect the record for the biggest European LBO to be smashed,? said one banker. ?The M&S deal has opened people?s eyes just as the Olivetti deal did in 1999. It?s going to be the start of a new era for Europe?s corporates ? venture capital is moving up to a whole new level that will suck in a whole new range of companies.?

The largest leveraged buy-out in Europe so far is last year?s Eu5.7bn acquisition of Italy?s yellow pages Seat Pagine Gialle, which included Eu3.2bn of senior debt and Eu1.15m in high yield bonds.

Green?s bid was almost double that size, containing about £7.5bn (Eu11.2bn) in debt financing from Barclays, HBOS, Goldman Sachs, Merrill Lynch and Royal Bank of Scotland, supporting his own equity contribution of £1.05bn and £405m of equity from other investors.

To successfully take over such targets, bankers estimate that at least four sponsors would have to team up. For a Eu10bn price tag, about Eu2.5bn in equity would be necessary ? meaning four sponsors would have to put up Eu600m each. This would leave Eu7.5bn to raise in the debt market ? Eu5bn of which could be borrowed in the bank market and Eu2.5bn of which could be raised in the high yield bond market. It would also be necessary to tap the US market to complete such a deal, but transactions this year have demonstrated that the appetite is there.

Although the M&S bid roused the financial community, the capacity of the leveraged loan market has been quietly building for the last few years.

?The catalyst has been a significant expansion in the investor universe for leveraged loans,? said David Fass, managing director and global co-head of debt products at Deutsche Bank in London. ?We have seen the introduction of equity income funds and hedge funds into the asset class, a huge explosion in the institutional fund market, and international players participating in European-only buy-outs.

?The other factor is the growth in size and scale of the private equity market over time,? he added. ?Due to their above average returns and successful investment track record, top quartile managers can raise large scale funds on shorter time periods.?

Fergus Elder, co-head of loan capital markets at JP Morgan in London, cautioned, however, that while the capacity is there on the debt side, getting several sponsors to work together on the equity side could prove difficult.

?It depends on the deal, but private equity sponsors do like to have control over the operations of the company and the exit strategy ? although large public companies would be easier to float again.?

But sponsors could skirt this issue by convincing some of their limited partners to co-invest, which saves the limited partners management fees and allows them to selectively choose to invest more funds in certain deals.