Anglo-Saxon private equity bidders pile into Madrid

There is little doubt that the Spanish private equity market is rocketing. And while historically the market has focused on mid-cap deals, the past 12 months have witnessed a surge in mega-deals such as Cortefiel, Auna and Amadeus Global Travel.

Ashurst Madrid managing partner Stephen Fox explains that while the overall market has been active for several years, what is different now is the value of the deals and the influence the major international private equity houses are having on them. "The volume of deals being done is actually flat, but now we're seeing larger deals instead."

Research from the Association of Risk Capital Groups in Madrid backs up such claims by confirming that there were fewer deals during 2004 than in 2003. But despite this dip in volume, the total value of buyouts and investments rose by 50 per cent on the previous year's figure to e2bn (£1.14bn).

The smart money is on 2005 smashing that again following the announcement of several huge deals, including Cinven's and BC Partners' (advised by firms including Freshfields Bruck-haus Deringer and Garr-igues) successful, record- breaking e4.35bn (£3bn) leveraged buyout of travel technology company Ama-deus (advised by Linklaters).

Ashurst advised the two syndicates of banks arranging the financing on the deal, which is the largest leveraged buyout in Spain to date, while Allen & Overy (A&O) and Clifford Chance were among the firms advising Amadeus's shareholders Air France, Iberia Airlines and Lufthansa, which together owned nearly half of the company.

Such transactions leave little doubt about the proliferation or impact these mega-deals are having on the Spanish market - the question is why they are only occurring now, when international and Spanish private equity companies have been active in the small and mid-sized company markets since the 1990s.

According to Freshfields Madrid partner Javier Gomez-Acebo, the dramatic upswing in large deals over the last year has come as something of a surprise to many of the large private equity houses. This is because, up until last year, there had been a consensus within the top buyout funds (such as Permira, CVC Capital Partners, Apax and BC Partners) that only four large deals were likely to occur within Spain annually.

This has obviously already proven to be a vast underestimation of the market so far this year, and the anticipation is that the second half of the year will be just as busy, with the sales of Spanish telecoms and cable operator Auna and retailer Cortefiel already underway. The reason for this is the current combination of low interest rates and the booming Spanish economy, which is growing above the European average, combined with the ongoing lacklustre trend in the financial markets, which is making the route from public to private a better option for many companies.

Managing partner of Lovells' Madrid office Jose Maria Balana argues that the fact that the majority of Spanish public companies are family-owned and managed is also assisting the market, as it is easy to reach agreement when there are only one or two key shareholders involved.

Amadeus, for example, was owned by three main shareholders, while Cortefiel (advised by Garrigues) is a family-run business owned by the Hinojosa and Quiros families. Both joint venture partners PAI Partners and Permira (advised by Pérez-Llorca Abogados and Linklaters) and CVC Capital Partners (advised by Uría & Menéndez and Slaughter and May) have made bids for Cortefiel. Ashurst is advising JPMorgan, Royal Bank of Scotland and ING Bank on the financing of PAI and Permira's counter-bid.

Local private equity houses have also done much to educate the Spanish people about the benefits of private equity, with Gomez-Acebo claiming that the traditional perception of private equity houses as "a bunch of rich pirates who come in and strip down and sell off businesses" no longer exists.

Indeed, he claims that many companies are instead jumping on the private equity bandwagon in an attempt to get a slice of the high prices currently on offer. "A lot of companies have come onto the market sooner rather than later because of concern that this current window of high prices might end. But funds are cash-rich at the moment and there aren't a lot of transactions for the level of interest."

The sale of Auna (advised by Garrigues) is a perfect example of the extremely competitive nature of the Spanish market, with three consortia making offers for the company and numerous others considering the deal.

Most of the big international private equity houses are represented in the bids. One group is made up of Kohlberg Kravis Roberts & Co (KKR), Goldman Sachs' private investment fund and BC Partners, with Freshfields advising; another comprises Providence Equity Partners, Blackstone Group, Carlyle Group and Permira; while the third consists of Blackstone and Providence, Thomas H Lee, JPMorgan Partners, Quadrangle and Ono.

This has resulted in a similar level of competition in the Spanish legal market, with both domestic and international firms vying for work. And it appears that almost anyone is able to get in on the action. For instance Willkie Farr & Gallagher and CMS Cameron McKenna, which do not even have offices in Spain, have secured mandates.

However, only a handful consistently appear on transactions.

Unsurprisingly, they are the leading domestic firms (Cuatrecasas, Garrigues and Uría), while the international firms (Ashurst, Clifford Chance, Freshfields and Linklaters) have been making inroads within Spain's high-value deals based on their standing relationships with the large private equity houses.

For example, Uría advised Advent International on its $195m (£110.7m) acquisition of leisure parks operator Parques Reunidos last year. Not a big deal in value terms, but it was groundbreaking because it was the first public-to-private transaction completed by a private equity fund in Spain. Clifford Chance advised the Royal Bank of Scotland as the funder on the deal.

Lovells is also looking to move into the market after launching its Spanish office last year following the hire of Maria Balana from Cuatrecasas, although the firm is still very new to the market and is yet to receive a successful mandate on a large deal.

But the outlook is positive considering the competitive nature of the private equity market. With so many funds active in Spain, smaller and developing legal practices have a good chance of winning mandates as private equity houses scramble for advisers.

"At the early stages of a deal, there are lot of people looking at deals, and private equity houses may even be running two or three banks against each other," Fox at Ashurst says. "So almost every firm can end up with a mandate, and even the smaller firms might end up being picked by the investor that turns out to be the winner."