Focus: Private Equity – August 2006
Private equity exposure for the public investor
In brief: Private equity's prominence in the M&A market is very much the norm today. However, with the increasing size of their acquisitions, private equity players are turning to 'traditional' institutional and retail investors to provide some of their debt funding. The financing package for the acquisition this year of the Myer department store business is an example of what may be a growing trend of private equity players partially financing their acquisitions through public offers of listed debt securities. Partner Robert Pick(view CV) looks at the specific debt securities in this deal and whether we are likely to see more like them in the future.
- What are the Myer Notes?
- Have these types of securities been used before?
- Are they attractive to investors?
- Are we likely to see more?
The Melbourne-based retail icon was sold to a consortium led by the US private equity firm Newbridge Capital (and included the Texas Pacific Group and the Myer Family Trust). As part of its ongoing funding arrangements, the new Myer Group has made a public offer of debt securities – Myer Notes. (Allens Arthur Robinson advised Coles Myer on the sale of the Myer business.)
What are the Myer Notes?
The Myer Notes are subordinated debt securities. The key features of the Myer Notes include:
- a maturity date of 6½ years;
- a fixed interest rate for the term of the notes, equal to the greater of 10 per cent and the 6½ year swap rate plus a margin of 3.95 per cent. Interest is payable twice yearly;
- the notes may be redeemed by Myer at a premium to their face value prior to maturity, with the amount of premium reducing from 6 per cent over the life of the notes;
- a right for noteholders to exchange some or all of their notes for shares in an IPO of the Myer Group at a 2.5 per cent discount to the IPO's retail issue price;
- the notes are subordinated to the senior lenders to the Myer Group, and secured by a second ranking security over the assets of the Myer Group; and
- the notes will be listed on the ASX.
The Myer Group are seeking to raise $225 million through the issue of Myer Notes and may accept oversubscriptions of up to a further $50 million. The proceeds from the issue will be used to repay bridging finance used by the consortium to purchase the Myer business.
Have these types of securities been used before?
This is not the first time that private equity buyers have sought to finance their acquisition through a public issue of listed debt securities.
Both Affinity Health and Emeco undertook similar note offerings in 2004 and 2005 (respectively), shortly after those businesses were acquired by new private equity owners. The Affinity Health and Emeco notes were issued on substantially the same terms as the Myer Notes, with minor variations around the maturity date, interest rate and IPO exchange rights.
As a result of corporate transactions involving each of Affinity Health and Emeco, the notes issued by each of them have now been redeemed. In the case of Affinity Health, the notes were redeemed (at a 6 per cent premium to their face value in accordance with their terms of issue) when Ramsay Healthcare acquired Affinity Health. In the case of Emeco, the notes were redeemed on the IPO of Emeco (at a 6 per cent premium to their face value in accordance with their terms of issue), with holders of more than 50 per cent of the notes reinvesting the redemption proceeds in Emeco shares in the IPO.
Are they attractive to investors?
The Myer Notes are likely to be an attractive investment to investors looking for fixed interest returns. However, the relatively high rate of return (at least 10 per cent) comes with attendant risk, including:
- interest payments may be suspended if Myer does not generate sufficient cash to pay the interest, or Myer becomes insolvent (although interest will continue to accrue); and
- the new owners have only been in control of the business for a short period, and their ability to improve the performance of the business is untested.
However these risks do not seem to have been a deterrent to investors in the past, with each of Affinity Health and Emeco issuing the full amount of oversubscriptions available under their note offerings, and Myer having announced before the close of its offer that it will be issuing at least $10 million in oversubscriptions.
Securities such as the Myer Notes provide retail investors with some (although limited) access to the benefits that private equity buyers are able to generate from their acquisitions. As debt securities, the notes provide only limited ability for investors to achieve any 'capital' growth – either through the redemption at a premium (if redeemed prior to the maturity date), or through the ability of noteholders to acquire shares in an IPO at a discount to the retail offer price.
Are we likely to see more?
With the increasing dominance of private equity players in the M&A market and the increasing size of private equity deals, combined with the relatively favourable outcomes for holders of Affinity Health and Emeco notes, it appears likely that there will be more offerings of securities like the Myer Notes. Further, the attractive return on these securities and increased profile of private equity transactions are likely to ensure that such offerings are popular with those investors who are prepared to accept some degree of risk.
For further information, please contact:
- Robert PickPartner,
Melbourne
Ph: +61 3 9613 8721
Robert.Pick@aar.com.au - John BeckinsalePartner,
Brisbane
Ph: +61 7 3334 3520
John.Beckinsale@aar.com.au - Matthew BarnardPartner,
Hong Kong
Ph: +852 2903 6212
Matthew.Barnard@aar.com.au
