Private equity in public eye

With the private equity house Kohlberg Kravis Roberts pulling out of a bid
for Sainsbury’s with, according to Reuters, competition concerns being the
primary reason because of its involvement in a £10bn bid for Allliance-Boots,
the world of private equity bids appears to have bumped up against one of the
last remaining limits to its expansionist tendencies – market regulatory
mechanisms.

Bids on this kind of scale are a world away from the few tens of millions of
pounds that private equity houses used to have to find to finance their bids for
mid-tier companies, which they would then reinvigorate with new, sharper
management and subsequently sell on for huge profit.

The fact is that these kind of activities and deals have always had rather
less chance of exciting the Office of Fair Trading and the Competition
Commission.

Rising bids
However, billion dollar bids for household name companies that are major players
in their field are another matter altogether and are bound to attract the
attention of regulators.

As Catriona Munro, head of competition law at Maclay Murray & Spens,
says, there are a number of grey areas where the regulator is free to use its
judgement to ferret out and block undue influence – and it is this that is
likely to have impacted on KKR’s involvement in the Sainsbury’s deal.

“The issue in the UK is that in order to be regarded as having an interest in
a company, for the purposes of being a competitor in two separate businesses, it
is sufficient to have a material interest,” she points out.

KKR was potentially going to have a material interest in both Boots and
Sainsbury’s, so it would be the equivalent of being the controller of those
companies. The regulator would aggregate its market share in the two businesses
and look at KKR as being an overlapping owner of the two.

“This, I think, is why the previous indication that Boots and Sainsbury’s
were said to have had from the regulator when they thought about merging [that
any deal would be referred to the Competition Commission] would apply to them in
the KKR instance as well,” she says. That was in the days when the OFT was wont
to have fireside chats with potential suitors. Since then, as Munro points out,
the regulator has had its fingers burned by discovering that reality can be more
complicated than any informal guidance to the parties involved.

“The deal KKR struck with Boots to get it to open its books for due diligence
was that the bid would be unconditional, so if KKR was going to bid for Boots
with no pre-conditions it was taking all the risk. If the OFT found that a
combined Sainsbury’s/Boots holding by KKR would not wash, KKR would then have
had to dispose of one or the other.”

Going to the market with a forced sale might well have meant KKR struggling
to get back its stake, never mind making a profit, so caution was probably in
order.

Regulatory radar
“The way UK competition law approaches matters like this is not to look at the
majority interest. A minority interest is a much less clear concept than
control, but you are still regarded as having control – and, logically, if you
are going to invest on this scale you would want to have some sort of
controlling mechanism in the company anyway, and the regulator would know this,”
Munro says.

Nadim Meer, a senior associate with the law firm Dundas & Wilson, says:
“It is very interesting to see how the big boys in the private equity market are
now coming within the scope of the regulator. Before this, the deals have been
well below the radar.”

Meer points out that it all comes down to definitions of market share, which
is often a fairly grey area. “You have to look at geographic spread in a market
and at influence. It is very difficult to pin down, especially with a
buy-and-build acquisition strategy that is starting to have some scale to it,”
he says.

Deloitte partner Gavin Hood, part of the firm’s Edinburgh finance advisory
team, says: “The fire-power and appetite that large private equity houses have
is extraordinary. The private equity community has become very sophisticated as
to how it will look at opportunities and at bringing in large-scale investment.
I would not be surprised to see bids on this scale continuing, but the ability
to generate returns diminishes the higher the price one has to pay on the way
in. Clearly, at present there is confidence in the private equity community that
there is a sound case for these bids,” he says.

KKR and Sainsbury’s
Kohlberg Kravis Roberts’ decision to pull out of the consortium to buy
Sainsbury’s is understandable. This is why:
• KKR is behind a bid for Boots, together with its deputy chairman Stefano
Pessina – and the chances are that this deal will ultimately go through.
• The OFT has previously said that any merger of Boots and Sainsbury’s would
likely result in a Competition Commission probe.
• If KKR is part of a consortium that buys Sainsbury’s – although this does not
amount to a merger of Boots and Sainsbury’s – they would both become part of the
KKR stable and hence come under the beady eye of the OFT.

The Office of Fair Trading website has some interesting past decisions. Go to
www.oft.gov.uk
and search on “private equity”

The Competition Commission website at
www.competition-commission.org.uk