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Debt Financed Takeovers Growing in Europe

April 30, 1989

LONDON (AP) _ An American-spawned takeover tactic known as the leveraged buyout is growing increasingly popular in Europe, where economic changes are causing corporate realignments in who owns what.

Buying and selling of companies is expected to accelerate further before the 12-nation European Economic Community becomes a barrier-free market by the end of 1992.

The boom is attracting American investment bankers, and already-established foreign banks have been strengthening teams of financial experts schooled in the strategy of leveraged buyouts.

But the potential might be limited, experts said in interviews.

″I don’t think it will reach the heights, the frenzy, it has in the United States,″ said Patrick Martin, managing director of Bankers Trust Co. in London.

Many Europeans, while copying the trend in the United States, are concerned about what they perceive as U.S. abuses of the financing technique, and they are fashioning their own kind of buyouts. These are smaller, friendlier and low-key, more conservatively financed, and less likely to lead to the breakup of a company.

It’s also unclear whether the European buyout scene is going to become a playground for eager foreign dealmakers, which include Kohlberg Kravis Roberts and Co., the U.S. investment firm that engineered the record $24.53 billion leveraged buyout of food-tobacco giant RJR Nabisco Inc. last year.

Ian Fisher, a director of London-based MMG Patricof Buy-Ins Ltd., said: ″Will American institutions, which have done well in the States, be able to translate well in Europe? I don’t think so. It’s cultural. The bad press is rape and pillage, the breakup. In Europe, hostility is something which people don’t like.″

In a leveraged buyout, an acquirer uses mostly borrowed money to buy a company. The money is repaid through the acquired company’s earnings, assets or a combination of both.

In the United States, leveraged buyouts have aroused controversy because they saddle companies with an enormous amount of new debt at a time when many already are shouldering massive borrowing costs.

American critics of LBOs also say some have resulted in massive layoffs and a decline in investment and research at the acquired companies, which must slash costs to pay the new debt.

In European LBO parlance, when the acquirers are the company’s managers, the deal is called a management buyout. When they are outsiders, it can be called a buy-in. When the target is publicly held, it goes private.

Nearly 3,500 European LBOs have been completed in the 1980s, according to the Center for Management Buyout Research at the University of Nottingham.

Britain, the leader by far, had 356 buyouts worth $6.4 billion in 1988, compared with 325 deals worth $5.4 billion in 1987, the center said.

In what would be one of the largest management-led buyouts in Europe, directors of Magnet PLC, a British maker and retailer of home improvement products, in March offered to purchase the company for about $1.1 billion.

Gateway Corp., Britain’s third largest food retailer, said in April that Kohlberg Kravis was one of several prospective suitors that had approached the company after it became the target of a hostile $2.9 billion bid from a group of British investors. Gateway said the talks with Kohlberg Kravis were preliminary and could lead to further discussions.

Another big deal was last year’s $1.2 billion buyout of France’s Darty SA, a household and electrical products retailer.

Some financial market strategists attribute the rise in LBOs to an elderly generation of European industrialists who simply want to sell their businesses and retire.

″Owners are aging and the sons and daughters are driving Ferraris and they’re not interested in the business. They want to sell because of family disputes, lots of reasons,″ Martin said.

Buyouts also are growing because of liberalized laws that govern business, particularly in France. Financing techniques are more sophisticated and institutions are increasingly willing to finance deals, experts said.

At the same time, European industries have been restructuring, shedding peripheral businesses to focus on their main activities.

″It was a la mode in the ’60s and the ’70s to be a conglomerate. It is not a la mode anymore,″ said Gilles Cahen-Salvador, president of Paris-based LBO France SA.

Cheaper stock prices following the October 1987 stock market crash are an additional incentive for takeover strategists to buy now. The recent increased profitability of European companies also makes them attractive targets.

While interest has been strong in most EEC countries, West Germany’s conservative business community has been less eager than others to embrace buyouts.

″These are in a sense new tools which have been overused in America, or abused very often,″ said Count Albrecht Matuschka, chairman of the Munich- based Matuschka Group, an investment concern.

He said West German businessmen would rather wait and see how the buyout trend worked in other countries. Even so, Germany had 30 buyouts last year, compared with only 20 during the rest of the decade.

Some Europeans worry that deals with heavy debt will bankrupt their targets if interest rates move higher. Like American critics of LBOs, they fear buyouts will lead to the breakup of companies and job losses in countries with already high unemployment.

Fisher said that in Europe, ″Breaking up is not a nice word.″

That makes dealmaking in Europe much slower and more complex than in the United States.

Despite the relaxation of some laws concerning takeovers, many restrictions remain stringent. In Britain, for example, a bidder for a public company needs 100 percent of the financing lined up before making an offer.

LBO strategists in Europe also may find that some aging industrialists are unwilling to sell companies they’ve guided through four decades of postwar prosperity.

″These companies are like their children. They’ve watched it grow up since the war,″ Martin said. ″To sell it is a very personal thing.″

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