Solving problems of going private

By ANTHONY HILTON FOR MAILONLINE
Updated:

 

THE more corporate governance tries to turn entrepreneurs into administrators and the more investing institutions focus on the massive rather than the middle-sized company, the more tempting it is for management to give up on the stock market and take their companies private.

This is particularly so for companies outside the FTSE 250, for whom the love affair with stock markets has soured. It brings them cost, visibility, liability and interference but few of the much-trumpeted benefits that encouraged them to go public in the first place. Most have a share price stuck in the mud. So they seek to take themselves private - or would if their institutional shareholders would let them.

It is one of the paradoxes of human nature that fund managers can be utterly uninterested in their smaller investments for months, but the day a private equity house comes along and tries to buy them out, they embark on a passionate love affair with the stock. This, however, is a cover for their embarrassing dilemma. They don't know what the shares are worth, but feel it must be more than a private equity house would offer. They feel they are under duress because a refusal to sell will demotivate the management, They overcompensate by holding out for too much, which leaves them with the uncomfortable choice whereby they end up as a minority, or they are forced to accept grudgingly.

Not surprisingly, a lot of deals have been lost as a result of this impasse. In others, PizzaExpress being the most recent, the deal has gone through but with a messy minority of refusenik institutions hanging on to a soon-to-be-unquoted investment.

Cometh the hour, cometh the man. Gavin Kelly, a one-time UBS broker now running his own boutique, Kinmont has hit on a way of squaring the competing interests. His plan is to offer shareholders a slice of convertible unsecured loan stock which would be quoted on the Alternative Investment Market, rather than cash. This, he says, would resolve the four key problems that beset buyout talks.

First, it would give selling shareholders relief from the bandit factor - the fear that the business is being stolen from them - because they would have a continuing interest through the convertible. Second, the AIM quotation would give them liquidity, something they don't have as a locked-in minority. Third, they get a free ride on the management talent of the private equity house.

Fourth, if the investment is a success they get taper relief from capital gains tax.

Smart fellow that he is, Kelly has run the idea past the likes of Alchemy, Bridgepoint and 3i on the private equity side and Deutsche, Fidelity, Schroders and Gartmore for the institutions. Their enthusiasm suggests the Kelly bond could open the door to a lot more public-to-private deals. Stand by for a flood.

Chicago battle

IT HAS been a long time coming but the Americans have finally let an overseas exchange set up in North America to compete with the local markets on more or less equal terms.

On Tuesday in Chicago, Eurex, the German-Swiss futures market which is now arguably the world's largest derivatives exchange, unveiled plans to provide from February real competition in the trading of their own products for the traditional big beasts of Chicago. The US exchanges are still wedded to floor trading but Eurex is, of course, electronic. It promises be an interesting fight.

Deserts are littered with the bones of pioneers who thought they could survive in hostile country, but Eurex has a better chance than most. Its much-circumscribed electronic joint venture with one of the Chicago markets (now to be closed) captured four-fifths of the eligible and available business. This suggests the electronic appetite among market participants is larger than the floorbased locals and Chicago exchanges' governing boards care to admit.

There is a twist for Europe too. The new venture will allow European traders to open positions in Eurex in Germany and hold them throughout the European and American working day before closing them in Chicago. In their tightly margined world, that will translate into more trading, more netting, less risk, less regulatory capital and - other things being equal - more profit.

Eurex has done its homework and the Chicago exchanges look vulnerable to an attack of 'lost business disease' - an ailment that almost sank the London financial futures exchange Liffe five years ago when its business decamped to Frankfurt.

But Chicago is a tough nut to crack. The Americans are not going to be routed easily on their own turf.

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