Acquisition-hungry private equity firms are seeking angles to avoid auctions, says Sharon Geraghty in The Globe and Mail

January 02, 2007

The year 2006 proved that no company is safe from the buyout kings who run private equity funds. With more money than ever in the hands of acquisition-hungry firms, investment bankers and analysts predict more to come in 2007.

Globally, private equity buyout firms announced more than US$700-billion in planned purchases in 2006, almost three times as much as in 2005. And even after that spree, they still have $1.6-trillion to spend, according to investment bank Morgan Stanley.

As the value of takeovers has increased, individual firms have teamed up in so-called clubs to make runs at ever larger targets.

Within a couple of years, some predict that there will be a $100-billion private equity purchase. A few years ago, investors would have scoffed at that idea, but many gave real credence to rumours in November that KKR and Texas Pacific Group would pay that much for Home Depot Inc.

In addition to familiar names such as Onex, KKR and Ontario Teachers' Pension Plan, new players such as Canada's Public Sector Pension Investment Board emerged as big buyers in 2006, adding to the competition for deals. For example, PSPIB plans to purchase Retirement Residences REIT.

With all that competition, some of the biggest buyout players in Canada are finding that it's tougher to dig up deals. Too much money is chasing too few deals, making it more difficult to put to work all the new cash that's pouring in from investors and successful investments.

It's a sellers' market, and sellers know it. Almost any asset that goes up for sale is shopped in an auction, something that private equity firms usually prefer to avoid because multiple bidders run up the prices.

"They are always looking for an angle to avoid an auction," said Sharon Geraghty.

In response, buyout firms are searching out sales before they start, and taking due diligence to new heights so that they can be willing to confidently make a winning bid if an auction is unavoidable.

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