Private equity smash and grab may sound IPO alarm
BREAKINGVIEWS-Private equity smash and grab may sound IPO alarm The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Johnson
LONDON, Oct 27 (Reuters Breakingviews) - The Stockholm listing of security firm Verisure VSURE.ST was meant to be a victory for Europe’s buyout shops. The region’s largest listing since 2022, it showed that public markets were willing to absorb large private companies without demanding a big discount. That’s good news given private equity managers are sitting on an estimated $4 trillion backlog of unsold assets. But just a year on from Verisure’s float, CVC Capital Partners CVC.AS is assessing a bid to take the struggling stock private once again. A deal, if it happens, would likely be lucrative, but also send a warning to the sector.
Before the Financial Times disclosed CVC's purported interest on October 21, Verisure’s shares were priced at just over €9 apiece. That’s about 30% below their IPO price of €13.25. After a few months of trading at or above that level, a selloff commenced in January of this year. It was, of course, a time of widespread market turmoil for any company that sells software or data, thanks to snowballing fears about AI disruption. European business services firms like RELX REL.L and Experian EXPN.L, which analysts frequently cite among Verisure’s comparators, were brought down simultaneously.
It’s hard to see why a business centred on human-led installation, monitoring and servicing of alarm systems should be among the most threatened by AI. The fact there aren't any other large listed home alarm groups in Europe may also mean it struggles to gain traction among analysts and fund managers. Its debt – which stood at 2.7 times its EBITDA as of June 30 – may also be weighing on investor confidence. Luckily, the group is targeting a leverage ratio of 2.5 times, meaning it doesn’t have much further to go.
Whatever the underlying reasons, the pessimism of public markets presents an attractive buying opportunity for private equity. Were a buyout shop to acquire Verisure at a 25% premium to its undisturbed share price, it would have an enterprise value of about €17 billion, of which at least €9.5 billion could be funded with debt. In total, that’s around nine times the €1.9 billion in EBITDA analysts are expecting for the full financial year, per a Visible Alpha poll.
If revenue grows by 8% a year under new ownership and the EBITDA margin rises from 46% to 50% – in line with analysts' forecasts compiled by Visible Alpha – borrowings could fall to €7 billion by 2031. This is provided free cash flow is used to pay down debt. An eventual exit on the same multiple would leave equity investors with €20 billion, implying an annualised return of over 20%, a decent payback for merely hitting market expectations.
Spotting mispriced businesses is exactly the kind of thing buyout firms should be doing. And Verisure has thrived under private ownership, having been de-listed back in 2006, then passing from EQT EQTAB.ST to Hellman & Friedman. Yet the group's legacy debt and a lack of comparable peers have also left it adrift in public markets. Given buyout groups still have lots of other business to sell, the fact Verisure may already be a take-private target again should ring alarm bells.
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CONTEXT NEWS
Buyout group CVC Capital Partners is in the very early stages of assessing a bid to take Verisure private, a person familiar with the matter told Reuters on October 21. This comes less than a year after Hellman & Friedman floated the Swedish security firm in Stockholm.
There was no guarantee Amsterdam-listed CVC would pursue a deal, and no offer has been made to Verisure, the source said.
Hellman & Friedman remains Verisure's largest shareholder with a stake of nearly 44%, according to LSEG data.
(Editing by Neil Unmack; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on JOHNSON/Jennifer.Johnson@thomsonreuters.com))