Elizabeth Judd, Writer
In mid-November, Patheon Inc., a mid-sized pharmaceutical manufacturer based in Toronto, announced plans to go private and merge with Dutch health-care company Royal DSM. It was JLL Partners, a New York-based hedge fund and Patheon’s majority shareholder, that engineered the transaction by partnering with Royal DSM in what The Globe and Mail described as a “complex” takeover deal.
Carol Hansell, Founding Partner at Hansell LLP, a boutique law firm providing independent advice to boards and shareholders, notes that this is the latest public company to decide “being public just doesn’t suit them anymore.” One common scenario in Canada, she says, is for a public company in need of financing to choose a private placement over going to the public to raise additional capital. Another is for a founder to decide that it would be less expensive and less labour-intensive for a public company to simply become private again.
Canadian public companies and private equity investors have been engaged in an intricate pas de deux for the past decade or so. In 2006 and 2007, IROs tended to quake with fear whenever private equity investors showed up at their doors. Geoff Castle, Manager of Group Investments at Kestrel Holdings, a Vancouver-based company that runs a proprietary fund and specializes in private deals, points out that unless IROs were the beneficiaries of very generous options packages, the arrival of a private equity investor looking to do a heavily leveraged acquisition at an astronomical price was not good news because it likely signalled that the IRO would soon be job hunting.
In the aftermath of the financial crisis, however, many companies began seeking out large private equity investors as a way to salvage a dire situation. One well-known example is Teck Resources, which made a debt-intensive acquisition of Fording Canadian Coal Trust in October 2008, the month when financial markets around the world began to tumble. Unable to term out its $9.8 billion in debt on the bond market as planned, Teck eventually recovered its financial strength through various financial steps, including the sale of assets and a private placement of a 17% holding with China Investment Corp. in 2009.
“In some parts of the world, we’ve gone full circle,” says Castle. “Today, big debt-financed takeouts are happening again, but I don’t think you’re seeing the aggressiveness you saw in ’06 and ’07,” he says. And at the same time, some companies, especially those in resources, shipping, and real estate, are still “knocking on the doors of private equity to shore up their balance sheets and fund their business plans,” he notes.
Today’s Canadian Private Equity Market
As of mid-November 2013, the five largest private equity-backed buyout deals in Canada were Mold-Masters, Stackpole International, Softchoice Corp., Interventional Products Business of Angiotech Pharmaceuticals, and Saguaro Resources Ltd., according to information that Preqin, a source of data and intelligence for the alternative assets industry, gave CIRI’s IR leader.
The number of buyout deals has certainly been increasing over the last few years, but there seems to be a significant drop in the aggregate value of the deals taking place, says Nicholas Jelfs, Senior Analyst and Press Officer at Preqin in London, England. Specifically, Jelfs points out that there were 100 buyout deals worth $3.6 billion in Canada from the beginning of 2013 through November 19. In 2012, on the other hand, there were 97 deals worth $4.5 billion, and in 2011, 84 deals worth $7.8 billion.
Castle points out that many different types of investors are included in the ‘private equity’ bucket. In fact, private equity investors run the gamut from wealthy individuals like Warren Buffett to dedicated, deal-oriented corporate entities, such as Onex Corporation in Toronto, and private equity funds run by well-known names like Blackstone or Bain & Company.
In some cases, however, a wealthy individual or family decides to acquire a large stake in a company with no discernible intent to take the company private or shake up the management structure. High Liner Foods, Inc., falls into this camp.
Tailoring the Story
Private equity investors differ from their institutional counterparts in a few key respects. First, explains Castle, “private equity investors act like they’re investing their own money because quite often they are.” He notes that this is very different from running someone else’s money “on a short leash.”
Because of the stakes involved, private equity investors are seeking different information from public companies and they tend to have a longer-term outlook. Castle notes that many private equity investors envision taking a strategic stake for the next 5-to-10 years. Unlike sell-side analysts or institutional portfolio managers, these investors are far less interested in short-term news events or current relative valuation metrics.
Candice Williams, a founder of Assembly Stakeholder Relations, a Vancouver-based IR analytics and consulting business, observes that private equity investors often want a deeper dive into a company’s operations. “You have to be able to provide more than metrics and data because they want an understanding of the operational improvements you’re striving for as an organization,” she says. “You need to help them with the colour and give them the background needed to understand goals that aren’t just quantifiable but are strategic in nature.”
Castle agrees, emphasizing that private equity investors are concerned with the big picture. “When you’re knocking on the door of a private equity investor, you need to emphasize that this is a generational opportunity in my company. ‘Here’s 20 years of valuation metrics for my industry, and look how low we are now compared to where we were at the top of the cycle,’” he says.
Typically, IROs are not the ones responsible for targeting private equity investors, but they may play a supporting role, says Castle. “If you’re doing a dedicated roadshow where you have to raise $100 million, the IR person can be a quarterback and say, ‘We’ve got to go up and down the west coast and meet these guys.’” Even if it’s not their job to make lists of potential private equity investors, he urges IROs to sit with the senior management team and brainstorm about prospects.
Hansell points out that IROs can offer invaluable advice on disclosure during the critical time when a private equity investor is first coming on board. She notes that there’s an exception to fair disclosure rules for information that’s supplied in the necessary course of business. Even though a company might disclose additional information to a private equity investor, it’s important to emphasize that the information be kept confidential. What’s more, Hansell says that IROs are able to weigh in on the wisdom of putting standstill arrangements in place to preclude the company from being subject to a broader takeover bid.
Finally, Hansell points out that when a private equity investor takes a large stake in a company, the IRO’s responsibilities tend to mushroom. “Once there are rumours of an interest on the part of a private equity investor or one actually invests, that can give rise to a lot of speculation about the future of the company,” she says. “So there’s a very important role for the IRO.”
Life After Private Equity
Most private equity investors have an exit strategy. When that exit strategy is to take the company private, IROs naturally begin fearing for their jobs.
Castle points out that an IRO’s professional longevity depends on his or her role at the company before the change in ownership takes place. “Not every IR role is created the same,” he emphasizes. “If the IRO is a member of the senior team who has investor relations as a side function, then maybe the individual will continue to have a role.”
And indeed, some do transition to the new entity. A case in point would be Greg Kist, former Vice President of IR and Marketing at Progress Energy Resources, a company that went private last year after being acquired by PETRONAS. In the wake of the changeover, Kist became President at Pacific NorthWest LNG, a company in which PETRONAS is a majority owner.
Whether an IRO lands on his or her feet depends on “the background and skill set of the investor relations professional and his or her ability to add value beyond a traditional, public company investor relations role,” says Dustin Kolb, who performs IR searches for Korn/Ferry International. He continues: “If the individual has a strong financial orientation and can add value on transactions or the commercial side of the business, there’s likely a role for him or her.”
Even when a go-private deal results in an IRO having to find a new job, the good news, says Kolb, is that there’s much higher demand for investor relations professionals now than ever. “If you’re a top performing IR professional, there’s a lot of opportunity out there,” he concludes.