Buyout firms could target UK mid-caps

By Siobhan Kennedy and Richard Barley

LONDON (Reuters) - Private equity firms could set their sights on UK mid-cap companies after failing to clinch a string of multibillion-pound takeovers of blue-chips, a top Morgan Stanley banker said.

In the past few weeks, the cash-rich firms have been forced to walk away from a series of proposed deals after their bids were rejected by chief executives who said they could create better value by remaining independent.

"There's still a huge amount of private equity money out there that is probably feeling some pressure to get invested," said Brian Magnus, co-head of UK Investing Banking at Morgan Stanley in London.

"But I suspect they'll conclude that it's easier to find a home in the (FTSE) 250 than it is in the 100," he told the Reuters Hedge Fund and Private Equity Summit in London.

Last week a consortium gunning for control of Britain's biggest commercial broadcaster, ITV Plc (ITV.L: Quote, Profile, Research, Stock Buzz), walked away after the company rejected its revised takeover offer.

And Permira was forced to drop its bid for HMV Group (HMV.L: Quote, Profile, Research, Stock Buzz) after the British music and books retailer rejected its raised 842 million pound ($1.5 billion) bid, saying it undervalued the company.

"Boards are feeling empowered to reject bids because we've seen a lot of half-baked bids or relatively badly thought through approaches," Magnus said.

Elsewhere, key shareholders in Dutch publisher VNU have signaled they are unlikely to support an agreed $9 billion buyout offer for the world's largest market research firm.

Instead they are pushing for a break-up which they believe will create a higher return.

"I wouldn't be surprised if they tail off now and we see less of those (approaches to big firms)," Magnus said.

"The only companies that should be capable of being taken private in an aggressive manner should be companies that need restructuring and aren't doing it."

BONDHOLDERS

If private equity firms do switch their attention to smaller targets, many investment-grade bondholders may breathe a sigh of relief.

Rumors of leveraged buyouts of targets as big as BT Group Plc (BT.L: Quote, Profile, Research, Stock Buzz) and consumer goods giant Unilever (ULVR.L: Quote, Profile, Research, Stock Buzz) led to a degree of panic in the debt markets in the first quarter, following last year's buyouts of Denmark's ISS and top telecoms operator TDC to a group of buyout firms for $14.11 billion.

While that fear has abated to an extent, thanks to ITV's rejection of the bid approach and the lukewarm reception of VNU's shareholders, the sheer amount of cash invested in private equity funds has raised the stakes, bankers said.  Continued...