There are 256 public companies in the UK with a market cap higher than £1bn. Excluding financial institutions, only Quindell (LSE: QPP), Ophir Energy (LSE: OPHR) and Betfair (LSE: BET), however, have enterprise values lower than £1bn.
These three companies boast a net cash position, i.e. their debt-free balance sheets can be loaded with debt. The allure of âcapital arbitrageâ for private equity is apparent.
Quindell
Quindell has been in the news for all the wrong reasons in recent times.
A takeover of the insurance claims processor has not been thoroughly discussed, yet a take-private deal holds strong logic. At Quindell, forecasts for growth and profitability are outstanding. If the company meets its targets a buyout could yield an internal return of return well above 20% — that’s the sort of rate of return typically required by private equity to invest in any business.
If Quindell were to be bought-out by private equity it wouldn’t have to report quarterly figures. As a public company, Quindell is under severe market scrutiny, so a buyout led by management, and with the backing of a financial sponsor, is a distinct possibility.
The involvement of the existing management team may prevent lengthy negotiations on price and strategy. In management buyouts, financial sponsors line up the financing package, most of which is debt, and usually support management, who retain a smaller stake in the acquired company and run the business on a day-to-day basis.
Ophir Energy
Ophir Energy is an independent oil and gas exploration company with operations in Africa.
Its stock has been under pressure for some time and is down almost 30% in 2014. Ophir stock was heavily sold off in March after the explorer announced that its Padouck Deep-1 well, offshore Gabon, had failed to find âsignificant hydrocarbonsâ in the targeted reservoirs.
Credit Suisse and other brokers, however, are upbeat about Ophirâs prospects. The Swiss broker has recently pointed out that the companyâs shares are undervalued by at least ÂŁ1. Ophir shares changed hands at 239p on Thursday.
In March 2013, Ophir raised ÂŁ553m via a rights issue. It generates no revenue, and its cash-burn rate is about ÂŁ35m a year. Private equity is active in the oil sector; Ophir is a high-risk/high-reward investment.
Based on trailing financials, Cairn Energy also emerged as a buyout candidate, but it recently agreed a $575m loan, which renders a take-private deal highly unlikely at present.Â
Betfair
Betfair stock has been looking for direction since September 2013.
The betting company isnât incredibly expensive â it trades at 2 times revenue and 9 times adjusted operating cash flow. Its operating profitability is solid. But new markets are needed, and private equity could contribute to speeding up expansion overseas.
Betfair rejected a proposal, which stood some 5% below its current stock price, put forward by CVC Capital Partners in May last year. Restructuring costs and impairment charges had an impact on its 2013 performance, but the business is back on track and is forecast to grow revenue at a fast pace in the next three years.