Intense competition among private equity firms to snap up more assets in Australia is likely to lead to several buy-out “stuff-ups”, according to a veteran of the Australian retail sector.
Gerry Harvey, chairman of retailer Harvey Norman, told the Financial Times that recent deal valuations suggested private equity firms might be in danger of overpaying for assets or raising their gearing to levels that could not weather a sudden business downturn.
”The early players made some killings, fine, but you have now got a lot of private equity searching to buy fewer available businesses,” Mr Harvey said. “That means you have to pay a lot of money, and sometimes way too much. There is not any doubt that over the coming five years you will see a lot of private equity stuff-ups.”
His comments come as the board of Coles Group, another Australian retailer, is studying a buy-out offer from a group of private equity firms spearheaded by Kohlberg Kravis Roberts, after last year rejecting an A$18.2bn (US$14.3bn) offer from the same group. Mr Harvey said he expected Coles to fetch “a very high price” because of competition for its strongest assets, which could prompt the board to break up the group to boost the value of the sale. He said Harvey Norman, a furniture and electronics retailer, would be keen to buy Officeworks, a Coles stationery and office furniture subsidiary.
“We have more skill to run Officeworks than private equity but maybe private equity will come in and blow us out of the water,” he said. “But if they do that, and really gear it up, perhaps we will just be able to buy it back two years later from them.’’
Mr Harvey faces a backlash from three institutional investors who are threatening to block a planned A$369m takeover by Archer Capital, an Australian buy-out firm, of Rebel Sports, in which Mr Harvey has a 53 per cent stake.
Mr Harvey, who has made billions of dollars from retailing after founding his first business in 1961, said these investors were “playing dumb” as he had accepted the offer only because it overvalued Rebel Sport. “I am the seller and if someone is silly enough to buy it, I have to do the right thing for all the shareholders. But I think they are paying too much.’’
Archer Capital said on Tuesday that it would not raise its bid but the threat by Perpetual and two other investors to block the Rebel deal underlines growing institutional shareholder activism.
The asset management arm of UBS, and Balanced Equity Management, are understood to have refused to endorse a planned A$11.1bn bid for Qantas, the airline. The deal requires approval by 90 per cent of shareholders.
Meanwhile, Lazard led a veto last month of a planned A$1.6bn management buy-out of Flight Centre, the Australian travel agent. Perpetual has also voiced concerns over plans by Tony O’Reilly, the Irish media tycoon, to buy APN News & Media for A$1.87bn.
Mr Harvey suggested such activism was probably “just a natural progression” from the growth of private equity and a closer analysis among institutions of how to extract more value from assets at a time of feverish takeover activity.