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An unidentified man using a smartphone walks through the Canary Wharf financial district in the evening light in London, Britain, September 28, 2018. REUTERS/Russell Boyce Acquire Licensing Rights
LONDON, Dec 4 (Reuters Breakingviews) – Double-dipping is frowned upon at social gatherings. Private equity groups are trying something similar in the capital markets: successfully listing a company, then coming back for a second bite by buying it back once its stock craters. Such manoeuvres may yield high returns, but they can also backfire.
Take Synlab (SYAB.DE), listed at the height of a Covid-19 boom in testing by investment group Cinven. The business, which makes kits to test for coronavirus as well as diseases like cancer, is in a slump. Revenue fell 14% between 2021 and 2022, while its EBITDA margin collapsed by nearly 30%. Cinven is now offering to buy it back at 10 euros a share, a skinny 23% premium and 44% below its IPO price, valuing the group at 3.5 billion euros including debt.
It’s easy to see how Cinven can make a good return. Synlab operates in markets like the UK and France, which have a growing stock of ageing citizens keen to use its more expensive testing kits. Even with the coronavirus boom fading, it should thrive. Assume Synlab can grow the 2.7 billion euros of revenue analysts expect it to deliver in 2023 at a conservative 5% rate and gets its margin back to a more respectable 23% over five years, taking EBITDA to 787 million euros. An exit on the same modest 8 times EBITDA multiple implied by Cinven’s offer would value the business at 6.3 billion euros. Cinven could more than double its money even without adding any debt to fund its purchase, according to a Breakingviews calculation that assumes 30% of Synlab’s EBITDA is used to pay down its existing borrowing each year.
Cinven isn’t the only discount shopper. In August, Sweden’s EQT (EQTAB.ST) offered to buy back software group Suse for a little more than half of the valuation of the 24% stake it listed in 2021. Similar targets are plentiful. European companies listed by private equity groups since 2020 are trading, on average, at a 22% discount to their IPO price, according to data from Dealogic and Breakingviews calculations. Dr Martens (DOCS.L), listed at 370 pence in 2021 by Permira, is now worth 74% less.
Bargain hunters also need willing sellers. Most investors in Synlab tendered their shares. Taking the long view, Elliott has snapped up a 7% stake. Buyout groups can hardly be blamed for making the most of other shareholders’ short attention spans. The message from such deals, however, is that it’s better to buy a private equity-owned company after it has listed.
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CONTEXT NEWS
Private equity firm Cinven on Sept. 29 offered 10 euros a share to take Covid test maker Synlab private.
The offer represents a 44% discount to Synlab’s initial public offering price of 18 euros in 2021, at the peak of the Covid-testing boom.
Cinven controls 43% of Synlab. Shares in Synlab were at 11.6 euros at 0932 GMT on Dec. 4.
Editing by Neil Unmack and Oliver Taslic
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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