2022 set for bumper buyout volume, supported by bulging pipeline

Buyout activity surged in 2021 with this volume reaching the highest level in Europe since the global financial crisis, while the burgeoning pipeline of jumbo transactions already in view means the coming year could be even busier.

The volume of financings supporting buyouts from all sources — including leveraged loans, high-yield bonds and equity — totaled €102.6 billion in the 12 months to the end of 2021, according to LCD data. This is more than double the €49 billion tally recorded in 2020, or the €45.5 billion seen in 2019.

In the European loan market alone, buyout activity in 2021 accounted for roughly €47 billion of volume. Again, this is more than double the €20.6 billion of such buyout issuance in the whole of 2020 (although it falls well behind the whopping €94.5 billion tracked in full-year 2007).

Overall, sponsor-backed loan volume supporting all types of deals topped €109 billion across 2021.

Exciting year

Indeed, market participants note that the coming year is set to be an exciting one for buyout activity, with the potential to break more post-crisis records. This optimism is underpinned by a host of massive record-breaking buyouts that may be in the cards, as private equity buyers look to put their reserves of dry powder to work — any of which could significantly boost buyout volume for 2022.

For example, KKR is said to be readying a bid for Telecom Italia SpA that would be backed by a €45 billion financing commitment, making it the largest buyout ever syndicated globally.

Even this size of financing could be topped though, if a potential private equity bid for GSK's consumer healthcare business emerges. Conglomerate Unilever's £50 billion offer for the asset was rejected earlier this week, while other industry bidders such as Proctor & Gamble are also rumored to be circling the asset.

Elsewhere, the potential sale of Walgreens' Boots pharmacies in the U.K. may also prompt a new jumbo buyout deal. The U.S. conglomerate is said to be considering its options with a sale to private equity in the mix, after receiving an approach from Bain Capital in 2021. A previous take-private of Boots by KKR and Stefano Pessina in 2007 remains the largest European buyout to-date, even if the supporting debt package never fully syndicated. A buyout this time around is unlikely to be of the same size as then but could still value the chain at roughly £6 billion, according to reports.

Private lessons

While the 2021 buyout calendar was littered with take-private acquisitions — such as I Squared Capital and TDR Capital's acquisition of U.K. power solutions group Aggreko PLC financed by a cross-border senior loan and bond package, or the bond-backed acquisition of asset manager Arrow Global Group PLC by TDR Capital — these transactions only accounted for 11% of the year's European loan market by deal count. Corporate carve-outs (such as the takeover of U.K. supermarket chain Asda from Walmart by the Issa brothers and TDR Capital) made up 23% of transactions.

Looking ahead, take-private deals initially look set to take a larger role in this year's leveraged market. Financing packages are already on the way backing the public-to-private acquisition of corporate and wealth services firm Intertrust NV by Corporation Service Co., and of Germany-based pet platform Zooplus by Hellman & Friedman. One of the largest anticipated deals of the year is the £5.4 billion debt package backing CD&R's take-private of supermarket chain Morrisons, which is expected to be financed with £2.4 billion-equivalent in secured bonds, £1 billion-equivalent in unsecured notes and £2 billion-equivalent in term loans, while last week AIM-listed pharmaceutical firm Clinigen Group recommended a sweetened £1.3 billion offer from Triton.

Part of the debt backing the public-to-private acquisition of McAfee Corp. by an investor group led by Advent International, Permira Advisors, Crosspoint Capital, CPP Investments, GIC and a wholly owned subsidiary of the Abu Dhabi Investment Authority is also expected to be partly financed in the European markets.

Corporate carve-outs are on the way too, and a jumbo €2.5 billion-equivalent first- and second-lien loan financing is expected to support CVC Capital Partners' carve-out of tea business ekaterra from Unilever. This debt package is expected to include a roughly €2 billion first-lien term loan of which roughly 75% is denominated in euros, with the remainder in sterling. A €470 million-equivalent, Australian dollar-denominated second-lien facility has been pre-placed.

Second string

Second-lien debt seems to be taking a back seat to the first-lien loan and high-yield bond markets for buyout financings early in 2022. For example, the £875 million-equivalent euro and sterling loan financing backing Triton's bid for Clinigen is currently split between a £410 million first-lien term loan in euros, a £250 million first-lien term loan in sterling, a £75 million revolver and a euro-denominated second-lien facility of just £140 million.

In the 12 months to the end of December 2021, some 46.1% of financing backing European buyouts came from equity, 22.7% from senior secured/unsecured high-yield bonds and 30.1% from senior debt. Just 0.4% came from second-lien debt.

Meanwhile, the average leverage differential between first- and second-lien debt on buyouts shrank to just 0.13x across the whole of 2021 — down from 0.46x and 0.44x in 2020 and 2019, respectively. Leverage provided by other debt/EBITDA rose to 0.56x from 0.19x, according to LCD data, as the market saw more buyouts structured with a higher percentage of high-yield bond funding. First-lien leverage across 2021 was broadly flat on the previous year, at 5.13x compared to 5.19x in 2020, although this was still higher than the 4.91x average recorded in 2019 and 4.74x in 2018.

Notably, the appetite for aggressive terms across all aspects of buyout financing slipped across 2021. While market participants note that valuation levels on certain transactions were still punchy, across the whole year the average purchase price multiple on European buyouts stood at 11.49x. This was down from a 12.34x average seen in 2020, although still higher than averages of 10.99x and 10.92x recorded in 2019 and 2018, respectively.

This fall in purchase price multiples has been echoed in a decrease in sponsors' equity contributions to buyouts. In 2021, total equity contributions averaged 46.6%, down from 51.6% in the whole of 2020 and the lowest such average recorded since 43.7% in 2017.