Private equity should make its move for struggling UK companies
Money is cheap and bargains abound – it’s a great time for private equity funds to make a bid for some struggling companies, says Matthew Lynn.
For BT’s long-suffering shareholders, it was the first sliver of good news in a long time. On Monday the share price suddenly spiked following reports that the telecoms giant had started asking its advisers to prepare a defence against a bid from a consortium of private-equity investors. It might happen and it might not. But what is clear is that BT is ripe for a takeover.
BT’s dismal conjuring act
Over the last five years, BT’s shares have fallen from around 500p to 100p. Even the bid speculation clawed back only a few percentage points of the losses. For a firm that is meant to be both a technology play, through its broadband network, and a media play, through its sports channels, it is a dismal performance. From two of the most exciting, high-growth industries in the world, it has conjured up very little.
True, the cost of installing broadband networks is huge. Sports rights are expensive to acquire and difficult to monetise, especially when you are clearly the second-placed provider. And BT has been weighed down by huge pension costs. It has been a difficult business to manage. Relatively new CEO Philip Jansen is trying to turn it around, but it is hard to argue that the firm has been well run.
For a private-equity firm, the attractions are obvious. BT’s control of crucial infrastructure will provide plenty of long-term cash. The broadcasting unit could be closed down, or spun off. Its EE mobile unit could be integrated into the main telecoms company. And it could refocus itself as a pure broadband and voice company, with lots of cost cuts and astute debt management to churn out more cash. It is the kind of business private-equity funds can be good at running. It would be a huge deal – BT is still valued at more than £10bn and there would be a premium to pay on top of that. And the government’s support would have to be secured, especially given that rolling out fast internet connections has been made such a high political priority. But it could still be a money-spinner.
And why stop there? This is a good moment for private equity to swoop on a whole range of major companies. With interest rates at record lows and likely to stay there for a very long time, debt will never be cheaper. And there are plenty of underperforming big beasts on the index.
Three more promising bid targets
Pearson, for example. The media conglomerate has been spectacularly mismanaged over the last decade, selling off valuable assets in newspapers and publishing just as they were about to make a success of digital, while investing in education just as it was about to come under assault from cheaper web-based competitors. It is hard to see how it can be turned around without a complete change of management. Over five years the shares have fallen from 1,200p to just over 500p. There would be lots of value for a bidder to unlock.
Or how about Lloyds? The bank has been nursed back to heath after the financial crash a decade ago, but you couldn’t tell from the share price. At less than 30p, the shares are back down to the level they were at in 2011. If nothing else, a private-equity firm could ruthlessly strip out costs and boost profits. It might even be able to break parts of Lloyds up to sell to Amazon or Apple: both companies are keen to get into financial services as fast as possible. At £20bn, it wouldn’t be financially impossible.
If a buyer wanted to think bigger, there is always BP. At 280p, the shares are back at levels last seen in the mid-1990s. The company keeps trying to reinvent itself as a green energy supplier and, while that is a noble enough aim, it might be better simply to run it for cash until the last petrol car and oil-fired boiler gets scrapped. With funds under so much pressure to divest from fossil-fuel businesses, it might well find it easier to operate as a private, rather than a public, company. There wouldn’t be so much scrutiny. At close on £60bn, it is a huge firm – but a consortium of private-equity funds could raise the money. With the economy in the doldrums right now, there will never be a better time to strike.