Private Equity Likes Strong Brand Names

Private Equity Funds often target companies with strong brand names in mature industries.  These companies often have strong, stable cash flows, which can be used to repay the acquisition debt.  Two transactions, both announced in February 2013, demonstrate this trend.

img-gallery05Food behemoth H.J. Heinz Company agreed to be acquired by Brazilian PE firm 3G Capital and Warren Buffet’s Berkshire Hathaway at a total transaction value of $28.8 billion. As part of the transaction, both 3G and Berkshire invested approximately $4.1 billion to acquire common stock of the company.  Heinz is a leader in the mature condiments market with large and stable cash flow, and the potential for additional cost savings.  The transaction closed in June of 2013, and the new owners wasted no time in shaking up the HNZ management team by dismissing 11 executives and replacing them with new personnel.

dellDell Inc. announced a deal to sell the computer maker to founder Michael Dell and PE firm Silver Lake at a price of $13.65 per share, valuing the transaction at $24.4 billion.  The company also announced that the Board would commence a 45-day go-shop period to seek offers from other bidders. This action led to two competing offers, one from PE firm Blackstone, which offered $14.25 per share for the entire company, and one from Carl Icahn’s Icahn Enterprises, which offered $15.00 per share for a 58% stake. Blackstone eventually dropped out of the process after Dell reported declining sales, but Icahn continued to purse the transaction and offered several alternative structures to the Silver Lake deal. The Board of Directors was hesitant to pursue the Icahn deal under the rationale that it involved too much debt and would place a financial hardship on the company moving forward.  After Icahn exited from the process, the company accepted a slightly improved offer of $13.75 per share from Silver Lake and Michael Dell in September if 2013.

While both deals involved blue chip names, the companies were in very different places in terms of competitive dynamics. Dell is facing cash flow pressures due to the changing nature of the computer industry (i.e. intense price competition and increasing consumer preference for tablet computers).  This makes it a much more risky LBO than Heinz, which operates in a more stable market. This difference can be seen in the acquisition prices, as Heinz received a bid that was 19% above its all-time high share price while Dell sold at a 75% discount to its all-time high.

Guest blogger Andy Kell is a partner at Trestle Capital Partners, a boutique merchant banking firm focused on middle-market investment banking, primarily mergers and acquisitions and related strategic advisory services, and direct private equity investing.

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