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Pacific Equity Partners, ANZ Capital sell Tegel Foods to Affinity Equity Partners in NZ$600 million leveraged buyout

Pacific Equity Partners, ANZ Capital sell Tegel Foods to Affinity Equity Partners in NZ$600 million leveraged buyout

By Gareth Vaughan

ANZ Capital has joined Australian private equity fund Pacific Equity Partners (PEP) in agreeing to sell poultry producer Tegel Foods for just over NZ$600 million to leveraged buyout firm Affinity Equity Partners. understands Affinity's offer is backed by financing from a syndicate of banks including ASB's parent Commonwealth Bank of Australia, Westpac, Macquarie Bank and Rabobank. It's understood this financing will replace Tegel's existing NZ$300 million plus in borrowings in place with ANZ, BOS International, Rabobank and Westpac.

Agreement on the sale of Tegel, which employs 1,550 people, was reached over the summer holiday period and neither PEP, which is selling its 43.1% stake, nor buyer Affinity, have made a formal announcement.

Affinity describes itself as an independently owned Asia-Pacific buyout fund manager run by the former investment professionals of UBS Capital Asia Pacific – the private equity arm of Swiss banking giant UBS AG. It was spun out of UBS Capital Asia Pacific in 2004. The firm's website says it aims to hold companies for four to six years before exiting and that it manages funds and assets worth about US$4 billion. Affinity has offices in Hong Kong, Jakarta, Seoul, Singapore and Sydney.

PEP acquired Tegel late in 2005 from HJ Heinz, in a deal that included management participation, for about NZ$250 million. It subsequently sold a 26.7% stake to ANZ Capital. Other shareholders include Lujeta Pty Ltd and Tegel management.

The latest annual accounts from Tegel's parent company show total comprehensive income for the year to April 25, 2010 of NZ$18.3 million up from NZ$10.2 million the previous year. The profit rose as revenue fell to NZ$401.7 million from NZ$464.3 million and cost of sales dropped to NZ$282.9 million from NZ$340.8 million.

The group coughed up net finance costs of NZ$30.9 million, down from NZ$45.3 million.

As of April 25 last year bank borrowings stood at NZ$230.9 million, a subordinated debt facility was worth NZ$53.7 million and a mezzanine debt facility NZ$34.6 million. That left total interest bearing liabilities at NZ$319.2 million compared with NZ$321.5 million a year earlier.

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Hooray - one highly leveraged set of owners buying from another set of leveraged buyers.  Another fleet of highly paid accountants lawyers and consultants earning fees on one side and same on the other.  Everone patting themselves on the back on the sell side and everyone telling how clever they are on the buy side. 

Superannuation funds and Mom and Pop investors paying excessive fees to the PE masters of the universe. 

Well done guys, what about a cruise on Sydney harbour, skiing in Whistler to celebrate?

Sorry if you work at tegel- sure will need to be more cost savings aka wages to slash to pay the interest bill or most likely more expensive chicken for NZ consumers.

Yes, you're right, that IS the New Zealand economy.

Yes well PEP made an absolute and stunning fortune for their investors - even net of their fees - you muppet.  Sometimes they go badly, and then sometimes they go very well.  Fecking simpleton.

Keyser you muppet, Whitcoulls, Yellow Pages, Griffins, Metro Glass, Indep Liq, Norfolk Group, Media Works, Myer, Goodman Fielder - some PEP, some not, but all = too much debt, negative returns to PE investors/shareholders, bad bebts to banks but fat fees day in day out for the owners of the PE firm.

Ged - they made very good money on Tegel.  That's all I am saying - it shouldn't be a sin to state a fact.  PEP made enough money on this to cover some of there other bad bets.  A private equity portfolio has anywhere from 5 to 13 investments and you hope they balance each other out in the end to produce a satisfactory return.  PEP are certainly a better brand than some of those other Australian PE outfits like Ironbidge or Catalyst.  And don't cloud a few big nasty australian PE firms who have cocked up (see my comments i left on Ironbridges Kerry Mac just before Xmas if you want to see how scathing I can be) cloud the rest of the industry.  They certainly do not reprsent our NZ PE firms and the majority of smaller AU ones.

I am personally pleased to see PEP hit a room run with Tegel.  It's a great brand, it was a great deal, and IT IS a homerun, regardless of what you want to believe.  The facts are the facts.



Bet someone had their arm held behind their back while they signed.

I reckon Tegel might have made a nice float on the NZX for mas and pas, preferably with a bit less debt on board. A household name operating in what's effectively a duopoly with Inghams...

I think you are right, and it was the preferred choice.  Selling to a private equity group means they had to leave more on the table - PE has higher return requirements (~25% pa) where as the public typically has around 10%.  Sort of a a yield, cap rate game.  And it is a great story as well.  But it was too large for the domestic capital markets to handle.  It wasn't possible in Australia as there was no Australian angle to the business and no interest from AU retail investors.

Perhaps Affinity will look to exit via a float, if the capital markets are in a better state at that point...

Well hopefully Affinity doesn't inflict on Tegel what they inflicted onto Colorado (this could be a little story you may want to look into).

Frankly - even if market conditions improve I doubt NZ's domestic capital markets would be able to absorb such a float.  NZ institutions are the issue - not retail investors.  It is difficult to get sufficiently large institutional investors to stump up large enough chunks for something of this scale.  This is an informed observation.

Is this what you're talking about regarding Colarado Group Keyser? -

Yep.  Affinity are known for their hostile bidding approach and aggressive, some say reckless, approach to leverage.  Now on tegel I wouldn't say either of those traits has reared its head.  The tegel process was a long dual track process that flushed them out.

as to leverage - the banks were gagging for it.  some of the gossip is that the stapled bank packages offered up about 5x senior leverage with a 'touch' of mezz to boot.  I would say 4x senior leverage should be the maximum leverage ratio and only for those with significant asset backing with strong prospects and stable earnings - only about 15-25% of coys fall into that range.  To me - the sensible gearing ratio for most PE deals should be between 2.5x (max for a retailer or cyclical company) to 3.5x for a joe blog stable industrial.

Speaking of leverage, we finally have confirmation of a NZ$1.05 billion haircut at Yellow Pages -

It won't be the last time they take a write-off either....

Gareth, it's also a  protected industry, ever ask why we dont see brazilian or Thai Chicken in the supermarkets.

Indeed. A nice business for the owners to milk.

Thai Chicken.....yummy......I recall nervously asking the waiter in some provincial part of Thailand  ,"What excactly is this?". ..."Thai Chicken !" , he enthusiastically replied. I hadn't seen foul for ages, but my thought were calmed by the melodious sound of the toads in the paddyfields.....

NA, that brazilian stuff comes with an extra leg for free and we all  get to go up a bust size.