Thursday8 August 2019 ★ FINANCIAL TIMES 13COMPANIES
JAVIER ESPINOZA AND ARASH MASSOUDI
LONDON
OLAF STORBECK— FRANKFURT
When the board ofScout24, the owner
of Germany’s largest property website,
was criticised this week for accepting a
takeover from private equity firms, the
only surprise was who delivered the
scolding.
Instead of politicians who have regu-
larly taken aim at the private equity
industry, accusing them of being asset
strippers, the rebuke came fromElliott,
the US activist investor and one of
Scout24’s largest shareholders. Its com-
plaint was that the bid was too low.
There are few better illustrations of
how buyout firms and activist investors
have become powerful forces in corpo-
rate Germany. A historic hostility to pri-
vate equity that prompted a senior
Social Democrat politician in 2005 to
liken the industry to a “plague of
locusts”, has been eroded as Germany’s
conglomerates shed businesses and
buyout firms raise record sums for deals
in Europe.
So far this year, Germany is rivalling
the UK as the biggest market for buyout
deals in Europe, new figures from Bain
& Co show. At the current pace, the total
value of deals in Europe’s biggest econ-
omy will come close to $25bn in 2019, up
from just over $14bn last year, accord-
ing to Dealogic.
“The dark history of the locusts and
the reputation that private equity had in
the country has changed,” said Rolf-
Magnus Weddigen, partner at Bain’s
German private equity practice. “Pri-
vate equity groups have been successfulin growing businesses and creating jobs
rather than cutting them.”
German companies have been at the
centre of some of the industry’s largest
European deals this year, fromKKR’s
acquisition of a minority stake inAxel
Springerthat will help the publisher of
the tabloid Bild to delist toCarlyleand
Bain’s €3.4bn offer to buyOsram, the
lighting company.
The willingness of such companies to
accept private equity investments, say
analysts, suggests how far things have
changed since the chequered experi-
ence ofGrohe, one of the world’s biggest
makers of taps and showers, under pri-
vate equity ownership in the mid-
2000s.
And there have been difficult epi-
sodes since Grohe, which was owned
both byBC Partnersand then byTPG.
Five years ago, a group of private equity
investors, includingApax Partners,
wrote down their investment inBun-
desdruckerei, the German group that
prints banknotes and passports, which
was overloaded with debt.
More recently, Blackstone, the US
buyout group, handed over the keys to
lenders inJack Wolfskinafter the debt-
laden German outdoor clothing group
saw business decline.ATU, a lossmak-
ing car repair chain bought by KKR, had
to undergo a restructuring that led to
multiple job losses.
However, the pick-up in activity sug-
gests the damage from such incidents
has not been lasting.
The slow shift in attitudes is helpingsome German founders who may have
been traditionally reluctant sellers to
rethink. KKR’s acquisition of a minority
stake in Axel Springer, which also owns
Business Insider, was symbolic because
it received the backing of Friede
Springer, the widow of the company’s
founder.
More recent entrepreneurs are also
opening to private equity. In 2016, for
example,TSG Consumer Partners, the
buyout firm, invested inCanyon, the
German bicycle company, as part of the
group’s expansion effort in the US.
“We have been waiting for succession
planning to come to fruition within the
typical German Mittelstand businesses
and it looks like some owners consider-
ing private equity as an alternative to
manage transition,” said Alex Dibelius,
head of Germany for CVC, which
recently bought a packaging unit off
Bosch, the German conglomerate.
If private equity firms are beginning
to make small inroads into the Mittel-
stand — family-owned small and medi-
um-sized companies — a different
dynamic is to prise open bigger German
businesses. As the outlook for global
economic growth darkens, German con-
glomerates are facing more pressure to
sharpen their focus.
In March,Evonik, the German chemi-cals company, sold its acrylic sheet unit
to Advent International in a €3bn deal.
Germany is also expected to be home to
some of the biggest so-called carve-outs
in the second half of the year, including
Bayer’s sale of its animal medicines
business andBASF’s disposal of its con-
struction chemicals division. Both have
drawn strong interest from private
equity buyers.
“We are approaching the end of the
cycle and corporate Germany is starting
to realise that this will impact its earn-
ings power,” argued Mr Dibelius.
“Besides a heavier focus on costs, port-
folio management will become more
important. This leads to more divesti-
tures of businesses that do not fit the
corporate strategy any more.”
However, Germany still has consider-
able hurdles for the industry.
Dirk Albersmeier, co-head of M&A at
JPMorgan in Europe, said that unique
features of the German market still
make it less hospitable to private equity
bidders. In particular, he said that buy-
ers often look to put in place a so-called
domination agreement, a feature
that does not exist elsewhere in Europe
and which makes completing a deal
tougher.
The agreement allows buyers to issue
legally binding instructions to a target’smanagement and gain direct control of
the company’s cash flows. In return,
however, it confers rights to remaining
minority investors that allow them to
push for a better deal than the original
offer.
Hedge funds, including Elliott have
frequently targeted situations where
they can profit from such a scenario as
when Bain and Cinven agreed to buy
Stada, the generic drugmaker in 2017,
only to have to raise their offer to win
over minorities.
“That’s why people say German take
privates are a nightmare because of the
domination agreement,” said Mr Alber-
smeier. But as there aren’t a lot of oppor-tunities, private equity firms are now
looking at the deals again. If you notice,
all the offers that are happening now are
pursuing a delisting, but not all are seek-
ing a domination agreement.”
And another positive factor for the
private equity industry — cheap money
— is gathering yet more momentum as
central banks from around the world
cut interest rates. It is a benign back-
drop that has allowed buyout firms to
raise record amounts
Germany’s growing dealmaking
comes amid extraordinarily benign
times for the buyout sector as execu-
tives raise their biggest funds. CVC, for
example, has raised $16bn for its largest
European fund as investors hunt higher
returns.
Ultra-low interest rates have pushed
large institutional investors to seek risk-
ier investments, including private
equity, and this has led to a jump in
activity in German dealmaking, accord-
ing to multiple industry observers.
For now there are no imminent signs
of activity abating. “We see no signs of a
slowdown,” said Mr Weddigen.Elliott’s rebuke reflects big change in Germany
The activist investor’s admonition signals a departure from the days when private equity firms were likened to locusts
Selected PE deals in Germany
Deal valueSource DealogicBain; Advent Intl/Concardis
bnBain; Cinven/Stada
Arzneimittel ( )
bnConsortium led by
Partners Group/CeramTec
bnConsortium led by
Partners Group/Techem
bnAdvent Intl/Evonik Industries’
methacrylates business
bnKKR/Axel Springer SE ( stake)
bnBain; Carlyle/Osram Licht
bn European buyout volumes
Estimated deal value, (bn)Source: Bain & Co * Includes SwitzerlandGermany will account
for about one-third of
buyout volumesGermany*Tota l bn bnHANNAH MURPHY— SAN FRANCISCOKik, the Canada-based messaging app,
has filed a rebuttal to a Securities and
Exchange Commission lawsuit that
claims its $100m initial coin offering
was illegal, accusing the US regulator of
“repeatedly twisting” the facts.The SEC announced in June that it was
suing Kikfor allegedly violating securi-
ties law by failing to formally register its
2017 token offering with the regulator,
in what is likely to be a test case for how
crypto offerings are defined in future.
According to the SEC, Kik managers
believed the company would run out of
money after it posted revenues of $1.5m
compared with $32.3m in expenses
between mid-2016 and mid-2017.
To counter this, Kik pivoted to a busi-
ness model financed by the sale of 1tn
“Kin” digital tokens marketed as an
investment opportunity, the SEC said.
But Kik said Kin, which users can earn
from watching adverts or completing
surveys, for instance, and then spend on
the platform, does not fit the definition
of a security, and as such did not have
to adhere to US securities regulations.
In a 131-pageresponse, Kik said theSEC had made a “consistent effort to
twist the facts” by taking quotes out of
context and “misrepresenting the docu-
ments and testimony that the commis-
sion gathered in its investigation”.
For example, the SEC alleged that a
consultant warned Kik that Kin needed
to be a registered offering. But Kik saidthe consultant then immediately went
on to say that in the case of a “commu-
nity currency”, this would not be the
case. “You’re just selling units of prop-
erty that you created that are used for a
particular purpose in your app,” the
consultant allegedly said.
Kik saidthe SEC quotedTed Living-
ston, its chief executive, selectively, fail-
ing to include instances in which he
emphasised that Kin was a community
currency and his warnings that Kik
could not guarantee Kin’s value.
The case is set to be a test for whether
certain digital tokens count as securi-
ties, at a time when crypto companies
say the SEC is failing to offer greater
clarity on the matter. In May Goldman
Sachs-backed Circle, a payments and
digital asset platform, fired 10 per cent
of its employees, citing regulatory
uncertainty.
It also comes asFacebook, a Kik rival
and the world’s largest social media net-
work, is pursuing plans to launch its
Libra cryptocurrency amid doubts the
token will be deemed a security by
watchdogs, which could demand it is
regulated as such.
See LexTechnology
Kik challenges SEC’s crypto lawsuit
Buyout activity in Germany this year includes Bain’s €3.4bn offer to buy Osram, the lighting company—Daniel Kopatsch/EPA-EFE‘The dark history of the
locusts and the reputation
that private equity had inthe country has changed’
Kik says its Kin token does not fall
within the definition of a securityLightbulb moment
As the global outlook
darkens, German groups
are under greater pressureto sharpen their focus
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