In a recent presentation, Steve Kunszabo, IRO at Centennial Communications, said the front page of the Wall Street Journal read ‘like a police blotter for private equity’. It’s an apt description. Even with the current market tightening, the amount of action in the private equity space is astonishing. The value of deals done through May this year in the US alone is $280 bn, more than in all of the 1990s. There are now 3,000 funds raising $500 bn worldwide.
It seems no one is untouched; if a private equity firm hasn’t approached your company, it’s almost certain one has at least done a deal in your sector. For those employed to handle the public life of a company, this isn’t necessarily good news.
Danger and excitement
From the first contact with a private equity firm, an IRO’s world is in turmoil, and most are only just coming to understand the model of private equity ownership. The work starts when there is an approach and the IRO is charged with selling the deal to shareholders (see Getting the deal done, below).
While this task presents an exciting opportunity, there is an inevitable follow-up question for IROs caught up in the private equity whirlwind: ‘Will I keep my job?’ Most positions are eliminated as there are no more analysts or public shareholders to consider.
Even so, Welsh Carson Anderson & Stowe and Blackstone Group took majority positions in the New Jersey-based wireless carrier Centennial nine years ago and have kept Kunszabo through various phases of ownership. Hertz’s Lauren Babus also held onto her job at the rental car company. Savvis, a global IT services provider, let IR go for about three years after private equity took over, then brought in IR director Elizabeth Corse to rebuild an investor outreach effort.
Some IROs take on new responsibilities. When Apax Partners acquired Incisive Media last year, financial director Jamie Campbell-Harris abandoned IR but was far from surplus to requirements. Instead, he began dedicating his time to working on integrating highly leveraged acquisitions with the rest of the firm. Incisive has already made five further acquisitions since it announced its plans to be acquired.
There may be an extended limbo. In July the private equity group of Goldman Sachs and TPG Capital announced a blockbuster $27.5 bn deal for Alltel. The wireless carrier’s IRO says it’s too early to tell the fate of the IR function. KKR’s buyout of Alliance Boots also has the future of Boots’ former IR team looking uncertain: former IRO Donal McCabe left the company in July and the role of his counterparts appears ambiguous.
Like most investors, private equity firms have finite time horizons. The Private Equity Council says a typical holding is three to five years. ‘Private equity wants to monetize its asset eventually, so it may take the company public again,’ explains Corse.
Should I stay or go?
IROs probably would stay on if there’s a realistic expectation of another IPO in two years, Kunszabo adds. ‘But if the time horizon for an IPO is six or seven years or if the company is likely to stay in private hands, there’s less need for an IRO,’ he says.
Smooch Repovich Reynolds, CEO of the California-based executive search firm TRRG, notes that the shape of the current role is also determinative. ‘Is it stand-alone finance-driven IR?’ she asks. ‘Is the position integrated with corporate communications?’
There is often room for IROs to switch to debt relations, a responsibility Babus took on while serving as assistant treasurer during Hertz’s one-year tenure under owners Clayton Dubilier & Rice, the Carlyle Group and Merrill Lynch Private Equity. ‘If there are public bondholders, the firm still has to communicate its strategy to them,’ Reynolds notes.
But as the role changes, some IROs may opt to move on. Reynolds is currently searching for a new IRO at a company going private – the incumbent chose to leave because ‘the next phase of the job would not include more traditional IR,’ she explains.
Still, there can be a lot to learn from different phases of ownership. If the time horizon for a re-IPO is short, ‘it may be worth staying on to go through that turnaround,’ Reynolds adds.
For those who do some form of IR during the phase of private equity ownership, the job does change. There are still investors to please, only now the stakeholders fit around a board table. Private equity partners usually take a number of slots on the board and are intense and active directors. Welsh Carson and Blackstone partners assumed five of the nine board seats at Centennial. ‘They ask very tough questions,’ warns Kunszabo.
In his days presenting to independent directors, Kunszabo says he needed to give more of a backdrop to explain market conditions. But director-owners ‘are fully plugged into the capital markets. My presentation has to be much tighter.’
A typical private equity firm might invest in 30 portfolio companies. ‘All they do is watch these investments and sit on these boards,’ Kunszabo says. ‘They live and breathe this every day.’
Tom Franco, a partner at Clayton Dubilier & Rice, says the new owners wouldn’t meddle in the day-today >IR responsibilities, choosing instead to channel their comments through the board. He confirms that his firm is interested in keeping up a broad constituency of potential investors so that any public offerings would be well received. ‘We’d listen to investor calls,’ he says. ‘Private equity is looking for an IRO capacity that goes on the offense.’
Finding the exit
Indeed, a big part of what the IRO will be doing is helping find the next owners. Recently Kunszabo worked with Blackstone to build a targeting model for a block trade of 10 mn shares. The move proved successful, and Centennial – which for tax and accounting reasons had always retained an equity stub – doubled its public float.
For a full IPO, the equity side would likely be gearing up with roadshows and other events a year ahead of time. That is real work for the one doing the targeting. ‘You’ve got to keep public investors with you throughout,’ Kunszabo says.
Corse says she spent a year and a half developing a long list of potential investors in her company’s debt even though they weren’t likely to be targeted in the near term. ‘We began an outreach campaign to get people familiar with the company’s story and build up a base so that when we did go to market, we’d have an audience to consider it,’ she explains. ‘It proved immensely useful.’
For Babus, investor targeting was easier. After a year as a private company, Hertz’s owners made the decision to make a public offering of a majority of its shares and found a receptive audience. ‘We didn’t really have a problem as Hertz is such a wellknown brand name,’ Babus says. ‘There was a lot of interest in the IPO and the secondary offering in June. Our private equity owners had quite a good track record, which helped the appeal.’
Franco confirms that private equity partners are increasingly seeing the need to have a continuing IR function. ‘It’s hard to make a blanket generalization,’ he notes. ‘The role might become a debt relations function, but since one of the most logical paths would be a public offering, it may be strategically advantageous to keep IR.’
Even better, there may be a wider range of opportunities within the remade company for IROs like Campbell-Harris, as familiar as they are with the finances and operations. ‘Private equity is a very innovative asset class so it may be that talented people can be viewed in a different light,’ Franco adds.
Getting the deal done
Most successful public-to-private deals start with non-hostile approaches, when an attractive offer is made to the company’s management team. If shareholders are guaranteed a healthy premium, IROs don’t have too hard a time convincing them to sell up.
Take the case of Thames Water, which a Macquarie-led private equity consortium took off the hands of German-listed RWE last year in a deal worth £8 bn ($16.2 bn). Reports at the time suggested the sale landed RWE with a gain ‘at least in the midhundreds
of millions of euros.’
RWE told its shareholders that it planned to sell its water divisions back in 2005. ‘Times had changed and shareholders agreed the energy sector was the right choice,’ remarks Liz Christie, who started off as IRO at Thames, then switched to RWE, before returning to Thames to oversee a possible IPO.
Likewise, Incisive Media’s 2006 de-listing posed no problem. Financial director Jamie Campbell-Harris looked after the UK media firm’s IR duties, alongside CEO Tim Weller, when it was approached by Apax Partners. ‘Management’s and Apax’s interests are very much aligned,’ says Campbell-Harris. ‘Incisive Media had been looking to grow the business, but Tim had been frustrated by the public market.’
Listed companies with a strong acquisitive growth strategy like Incisive’s often struggle when it comes to leveraging the balance sheet. ‘We weren’t able to do quick deals as there’s more regulation involved and raising money was sometimes tricky,’ Campbell-Harris explains. ‘Public shareholders expressed concern after we acquired Risk Waters in 2003; they thought it was time for us to settle down.’
When the deal was announced in September, some investors complained they weren’t being offered enough money. ‘Incisive Media as a stand-alone business is not attractive, so it’s ironic that shareholders weren’t supportive of a strategy that would have got them the full price,’ says Campbell-Harris.
Not all companies succumb so easily to private equity suitors, though. J Sainsbury, Marks & Spencer and the London Stock Exchange have all witnessed strong share price performance since they turned down takeover bids. Alliance Boots turned down an initial £9.7 bn bid from KKR; weeks later, the bidders returned with an irresistible £11 bn offer, which Boots’ IR department had no trouble convincing investors to accept. ‘About 99 percent of the 80,000-odd shareholders voted in favor,’ says Philip Ost, a member of the group’s legal division.
After fending off a £10.1 bn takeover bid by private equity group CVC in April this year, Sainsbury’s has now been targeted by the Delta Two investment fund in a £12 bn takeover. In light of this second stab at taking the supermarket group private, Sainsbury’s IR team is no longer available for comment.
