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Private equity groups are seizing on the break-up of Europe’s last industrial conglomerates as they buy up the non-core businesses the companies are offloading.
Germany’s BASF last month agreed to sell its coatings division to US-based investment firm Carlyle for €7.7bn, while other industrial groups including France’s Safran, Switzerland’s ABB and the UK’s Smiths Group are weighing or have this year explored the sale of assets deemed non-essential.
There have been almost €60bn of European private equity carve-outs this year, according to data from market researcher PitchBook, accounting for 13.5 per cent of PE deals by value.
In targeting such takeovers, buyout groups see opportunities to substantially improve divisions that have not yet passed through private equity ownership.
“This is really what we do, finding these businesses that are high quality, businesses that maybe aren’t core to the parent,” said Martin Sumner, Carlyle’s global head of industrial and transportation, adding that his team had executed more than a dozen such carve-outs over the past two decades.
“We can efficiently transition that to a standalone company, invest for growth and really use it as a growth platform,” he said.
European conglomerates’ efforts to sell or spin off parts of their businesses come after similar moves by US peers such as Honeywell, which this year said it would split into three.
The number of deals in which European groups have sold off divisions to private equity has steadily risen for the past couple of years and dealmakers expect activity to continue, as large companies navigate shifting markets and pressure from investors.
“Big listed corporates are evolving themselves strategically as we go through a next wave of industrial progression,” said Sam Newhouse, global vice-chair of M&A and private equity at Latham & Watkins. “Many of these businesses are highly successful businesses, they’re just deemed not core or in the strategy of the holders long-term at the moment.”
Aside from BASF’s coatings unit, other potential carve-outs that could wind up in private equity ownership include part of Safran’s aircraft interiors business, Smiths Group’s baggage-screening detection unit and Continental’s non-tyre rubber business ContiTech, according to people familiar with the matter.
Private equity groups are also circling Volkswagen’s planned €6bn carve-out of its Everllence division, the FT reported last week.
However, SoftBank’s $5.4bn deal last month to acquire ABB’s robotics arm precluded the possibility of another private equity carve-out.
Private equity groups are attracted to such deals because there is the possibility to make a strong return by increasing investment and focus on a business that may have lacked both.
“Generally speaking in a carve-out situation, there’s a good opportunity for a new owner to drive more focused strategic and operational improvements in the business,” said Eduard van Wyk, a London-based partner at investment bank PJT. “There is ultimately a reason why it is getting sold.”
Private equity group CVC is expected to generate a substantial return as it readies a possible exit from Syntegon, a packaging machinery business it acquired from Germany’s Bosch in 2019, according to people familiar with the matter.
It is not just the industrial sector where carve-outs are rife. Consumer companies are also among those exploring such deals, with assets such as Nestlé’s water business attracting private equity interest.
But dealmakers caution that these transactions are difficult, given that the newly independent entities will need to set up in-house functions ranging from their own IT systems to human resources and finance.
Research from consultant Bain & Company found that private equity groups’ average returns on corporate carve-outs have fallen since 2012, even as the best such deals still produce solid returns.
“Carve-outs take a special skill set. They’re complex, the challenges are more nuanced and at the messier end,” said Jonny Myers, global head of private equity at Clifford Chance. “The interest is strong for the right asset.”
