Private equity investment in a public company is always a headline-capturing affair. The epic tale Barbarians at the Gate — The Fall of RJR Nabisco, chronicles how Kohlberg Krabis and Roberts, a large American private equity house, took over RJR Nabisco for almost $26 billion in 1987. The book has memorialized the thrill and excitement surrounding such an affair.
There has usually been a clear distinction between private and public equity investments. The style, objective, structure and active involvement are distinctive between these two classes of investment. But in many instances, the “barbarians” like to cross over and hunt for deals in public markets. The appeal is clear: public companies are prized targets by the way they naturally graduate to become public, and most shareholders of public companies are more or less willing sellers at the share price plus some premium.
Private equity investments in public markets come in two main flavors. The more opportunistic flavor is PIPEs, or Private Investments in Public Equities. A PIPE is basically a privately held company owned by a group of investors that purchases a substantial and influential equity stake in a public company, but keeps the target company listed.
On the other hand, the “take-private” flavor has become a well established strategy in the past few years, and is by definition the complete takeover and delisting of a target company. A private equity fund offers shareholders in the target company a price (usually above the listed price) and, if the fund’s offer is accepted by the vast majority, the fund will squeeze out (subject to the availability of such rules) the remaining dissenting shareholders and take over 100 percent of the company. Ambitious mega buyout funds have repeatedly adopted this strategy in the past three years.
Private equity financiers in the region have been inspired, and have successfully tried to hunt for deals in regional public market. Aramex is the best known example. It was taken private in 2002 from NASDAQ, and then taken public again in 2005 on the Dubai Stock Exchange, resulting in 197 percent gross capital gains for the investors. Egypt seems to be a fertile ground for such an investment strategy, as we can see from the table below, mainly because of its deep public markets, its semi-developed takeover laws and its laissez-faire regulators. The Gulf Cooperation Council, on the other hand, has not witnessed substantial take-private activity, as both the laws and the regulators deter such activities.
With valuations of regional markets rock bottom, the coffers of private equity funds full and the number of private deals limited, funds are figuring out how to take advantage of this once-in-a-lifetime opportunity. The arbitrage potential is crystal clear, and willing (or distressed) sellers are available.
There are private hints and public announcements that private equity funds are actively working on public deals. They better hurry. Markets have risen by 20 to 40 percent since they hit bottom in March, and valuations have increased by 20 to 50 percent over the past few months.
Imad Ghandour is the executive director at Gulf Capital