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Large mergers often present investment opportunities for PE and financial sponsor purchasers because competition authorities may require merging parties to divest certain assets to obtain merger control clearances. The requirement to complete these divestments within a specified timeframe puts great pressure on the merging parties to sell. PE and financial sponsor buyers are often actively courted by merging parties because they usually do not raise material competition concerns and this allows for a faster sale process.
However, competition authorities on both sides of the Atlantic view PE firms with increased scepticism. A purchaser of a divested business must demonstrate sufficient ability and expertise to ensure that the divested business will remain a competitive force in the long run, which is typically more difficult for a PE or a financial sponsor buyer than a trade buyer. In addition, if the PE firm or financial sponsor has a short investment horizon (five years or less), this will be viewed as an additional negative factor, given that competition agencies prefer long-term solutions.
The EC will in principle not allow the acquirer to include pure PE or financial sponsor players (i.e. those without existing investments) in an auction process for divestment businesses in complex industrial sectors that require industry-specific expertise. Merely teaming up with experienced management teams (such as industry veterans) will typically not be sufficient and has been rejected in recent industrial mergers such as Linde/Praxair or Ball/Rexam. The EC has taken an even more stringent approach in certain leading cases in the pharma sector (see Takeda/Shire) by imposing sector-specific buyer suitability requirements on top of three basic requirements of independence, financial resources/expertise, and lack of prima facie competition concerns. These made it all but impossible for pure PE firms and financial sponsors to participate.
There are examples where the EC accepted the inclusion of PE firms in the auction process for the divestment business. Most recently, in Nidec/Whirpool, the EC agreed to the sale of Nidec’s refrigerator compressor business to a PE firm. Similarly, in AB InBev/SABMiller the EC agreed not to exclude PE firms from the auction process for SABMiller’s Central and Eastern European Business (although Asahi ultimately bought both divestment packages). On the other hand, in more complex industrial sectors such as industrial gases the EC was very sceptical vis-à-vis pure PE players or even PE players who had teamed up with management teams with industry-specific expertise.
In the US, the current Democratic Commissioners of the FTC (Commissioners Chopra and Slaughter) have expressed scepticism about PE purchasers, particularly due to their short-term investment approach. On the other hand, FTC Chairman Joe Simons appears to be more open to PE buyers as candidates for the acquisition of divestment businesses, taking the position that the suitability of a PE buyer should be assessed on a case-by-case basis, which depends on the fundamentals, the track record, and the strategy of the PE buyer in question.
That said, in Linde/Praxair, the US FTC imposed a “no-flip” restriction on a consortium between an industrial player and a PE buyer in a February 2019 Modified Final Order, giving the FTC the right of prior approval if (i) the industrial player’s stake in the JV falls below 50%; or (ii) if Messer and CVC decide to sell their JV interests to a third party. This “no-flip” restriction appears to echo to a large extent Commissioner Chopra’s concerns about the short term investment horizon of PE firms.
All else being equal, the question of whether PE purchasers will be considered suitable purchasers will ultimately depend on their fundamentals, including their track record, investment horizons, leveraging/access to finance, plus the degree of complexity of the divestment business. This is a case-by-case assessment, whose ultimate goal is to identify a buyer that has the capability and the commitment to ensure that the divestment business will remain an effective competitor in the long run. PE houses seeking to acquire divestiture businesses should carefully consider how to present their track records and business plans in the best possible way to assuage any concerns about their ability and intention to continue to operate the business.