While the crisis has not changed the fundamentals of our business, it has permanently influenced the manner in which it is performed. Under these new conditions, Eurazeo has strengthened its role as professional and responsible shareholder and continued to develop a strategy for creating long-term value.
The year 2009, characterized by a slowdown in acquisitions and sales, has led us to work closely with our holdings, on both their general profitability and their strategic choices.
The year confirmed the relevance and effectiveness of the Eurazeo model, in the face of new challenges and new perspectives.
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Our business is tested by the economic conditions |
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Since 2007, we have been experiencing a dual financial and economic crisis, with the latter a direct result of the former.
In the short term, the financial crisis has led to a scarcity of bank financing and the shrinking of the debt market for the capital investment business. Banks are becoming fewer and less willing to lend money, and are more demanding in terms of guarantees and lending conditions. Immediate consequence: the need to invest more equity in transactions that present lower degrees of leverage. These transactions are also expected to probably change in size, and be closer to the levels seen in 2002-2004 than those seen in 2006-2007.
The period was also marked by the concentration of participants. Different movements - mergers, disappearances - will encourage the emergence, in the short term, of a new competitive playing field. Some players will also tend to focus on their domestic markets, recognizing the virtue of maintaining proximity to the companies in which they invest.
The economic crisis has had a direct impact on the operations of our investments. The initiatives they have undertaken are beginning to bear fruit, enabling them to improve their cost structures and recover their ability to bounce back from a commercial standpoint.In this particular context, Eurazeo has chosen to focus on developing its current holdings, while remaining attentive to new investment opportunities.
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Eurazeo: the exact same business, with changing practices |
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Our business is to be a professional and responsible investor. Our long-term commitment to our investments allows us to provide them with stability, resources and skills to promote their growth and create sustainable value.
Today, we are focusing on a limited number of investments, over which we exercise either control or have a significant influence. Nonetheless, we don’t invest more than 10% to 15% of our total asset value in a new company, in order to diversify the risks.
The three main phases of our business - acquisition, development and sale - remain the same, but signifi cant changes have occurred in how they are carried out.
Acquisitions: more caution, greater perspective
Now more than ever, all our investment decisions must comply fully with our basic criteria: quality of management, barriers to entry, profitability and sustainability of cash flows. We are investing for the long term in companies with reservoirs of growth, over which we can exercise a position of control or significant influence, and with which we can develop a true strategy for creating long-term value.
While our business remains unchanged, we are now also interested in smaller companies, when they show a strong potential for growth in a promising sector and that growth requires additional capital. We invest primarily in France, in order to stay close to the companies’ management.
Our job is to grow businesses, and not just to do to leveraged buy outs. Leverage is simply one means for funding and for optimizing the return. If leverage is reduced, we will continue to make acquisitions, and their performance will just come more from growth and operational improvements.
Development: more than ever, an active, committed and responsible partner
The recent period has led us to play an even more important leadership role with the management teams of our holdings, to help get through the crisis and to continue to create value.
In addition to the usual financial discussions, we worked with them on broader issues: implementation of savings measures not anticipated in the business plans; deployment of new decision-making, internal control and risk management processes; enhancing governance; etc. We are redefining strategic development going out four or five years, and developing new tools to improve information and responsiveness. With one ambition: make every effort to ensure that our investments can take advantage of the recovery from its earliest signs.
Specifically, in addition to helping the management teams of the companies with the restructuring of their financing (APCOA and Rexel), or with establishing cash flow schedules (Europcar and APCOA), we contributed actively to the strategic planning of some of our investments Thus, with Europcar, we defined a more active operating procedure to review vehicle purchase decisions in light of changing market conditions, and helped management with its efforts to diversify both the company’s sources of supply and the channels through which it resells vehicles. At Accor, we participated in the decision to split the company’s two traditional businesses (Hotels and Prepaid Services) and to focus the Hotel division on the budget segment with less capital-intensive development. Eurazeo also orchestrated a general reorganization of APCOA’s management structures. Finally, we provided support for the development projects of ANF and B&B, which were not affected by the crisis.
In an uncertain environment, our investments have increased their requests for advice, dialogue and support: these exchanges have further strengthened our close cultural and personal relationships with the management of these companies.
Divestitures: longer holding periods
The crisis has durably altered the balance between leverage and growth strategy. It leads us to provide even more support to our investments over time and to collaborate with them on strategies for organic and external growth (targeted or transformational acquisitions). We want to make sure they will continue to grow and create value, well beyond the due date of our exit.
Acquisition, development or divestiture: these new operating procedures may characterize and help define the new shape of the private equity business for some time to come.
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Challenges and outlook
- Ensure the long-term sustainability of existing strengths (stable teams, available liquidity, asset diversification, etc.) to retain a permanently strong position in the market.
- Remain a strong company with no structural debt at the Eurazeo level.
- Provide financial and strategic assistance to our investments to help put them back on the path to growth and continue to create sustainable value.
- Prepare to take advantage, as early as 2010, of the investment opportunities to come.
- Develop new axes of intervention, as with Eurazeo Croissance.
- Grow our holdings through acquisitions, taking advantage of favorable purchase conditions.
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Questions for Virginie Morgon, Director of Investments |
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Since the crisis began, you are spending more time on the development of your investments. In what ways have your contributions changed?
The crisis has allowed us to play our full role as a professional and responsible shareholder, giving us more time and more perspective to assist our investments in a more difficult environment.
Even if, due to the lack of visibility, we had to play it by ear somewhat in the short run, we held our course firmly in terms of long-term strategic thinking, and kept in constant contact with the management of our investments. This led us to work on issues far beyond the usual financial questions, such as the activities and geographical positioning of our companies, product portfolios, core businesses, investment choices, etc.
In an unstable economic environment, this dual short-term/ long-term vision has led us to analyze very precisely whether the changes observed were only short-term or whether they were indications of more structural shifts.
Is this kind of approach a sign of major changes in the profession?
From the relationship standpoint, the personal aspect of our profession will become a more important factor in any acquisition. It is what will allow us to differentiate ourselves. In 2006 and 2007, we worked a great deal using procedures administered by banks. This approach engendered a great deal of distrust among all the players: acquisitions were too quick, too expensive, and there was a lack of trust and respect. We have already gone back to a people-oriented business, where sellers want to speak with only one buyer, up close and confidentially, and taking the time to do it right. A company like Eurazeo, with extremely deep roots and which is extremely well connected and regarded, is ideally positioned to go after its deals very far upstream, directly from the major corporate and family-owned groups. Although we are very good at the personal touch, we realized that we have to enhance it even more. Besides, spending a little more time studying a company first is a good way to bolster confidence in its potential to create value over time.
What are Eurazeo’s most critical qualities and values, especially in these times?
Our long-term approach, flexibility and close relationships with our investments. These are not empty words, as the way we worked in 2009 proved that we know how to support our companies while respecting our commitments to our banking partners. I will venture even further and say that we have rediscovered the virtues of proximity, be it geographical, cultural or personal. This value of proximity, embedded at the very core of our DNA, was timelier than ever in 2009 in our relationships with our investments.
Other key qualities: Eurazeo is a responsible, disciplined and ambitious investment company. In spite of current economic conditions, it has been able to maintain a climate of confidence conducive to business. It has also demonstrated its ability to make decisions and take action quickly, in a well-informed manner, and with total transparency vis à vis the companies in which it invests.
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Questions for Gilbert Saada, Director of Investments |
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What tools and processes have you developed within your investments to promote decision-making in times of crisis?
During the period we just traversed, we were seeking more accurate and more frequent information, as we had to understand very quickly exactly what was happening. As forecasting was problematic, we had to readjust our decisions constantly, with more frequent meetings and submissions of information from our investments. The tools and processes had to adapt to conditions.
At our request, the finance departments of our investments changed their traditional methods of cash forecasting, in order to provide us with the most accurate data possible. This enabled our investments to project their needs and maintain a sufficient level of cash. We also set in place new internal procedures and more frequent controls. For example, ever since the crisis started Europcar has reviewed all of its fleet purchase decisions once a month in order to follow changes in the market as closely as possible.
These initiatives have clearly helped make better informed and more effective decisions in an environment where the ability to react quickly is crucial.
Have your investments taken kindly to your increased presence?
Our position of control or signifi cant influence allows us to act fast and make decisions quickly: this is crucial in times of crisis, such as when growth is starting to rekindle. This does not mean that we try to substitute ourselves for management; we just spend more time assisting the companies we invest in. Consequently, and despite the occasional initial reluctance, our investments now recognize the benefits of these collaborations.
Discussions with management are now more frequent and richer, relationships have grown closer, and managers have recognized that we can provide them with perspective, expertise and a more comprehensive overview of events. We have proven that we are an active shareholder, capable of providing resources and means as well as challenging the long-term management of companies in light of the current economic environment.
Today, almost all of our investments have a balance that allows managers to work on growing their business, rather than having to worry too much about their bankers and other financial partners. How many companies can say the same thing?
What do you consider to be Eurazeo’s main challenges for the future?
The challenges our investments face concern their balance sheet structure and cash flow generation, as well as longer-term considerations such as their growth strategies. Our investments are battle-ready in an environment of slow growth. At present, we must really have a feeling for the upturn in the economy, make resources available at the right moment and be able to invest quickly in order to restart. This implies having both the financial capability and, of course, a certain state of mind!
Lastly, we must have the resources to start investing again, and to take our feet off the brake at the right time.
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Strong assets for the future |
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Sustainability, long-term vision
Eurazeo’s capital is held primarily by family and institutional investors, providing the firm with shareholder stability. One shareholders’ agreement (among the founding families of Lazard, formerly SCHP) alone accounts for nearly 21% of all shares. Crédit Agricole has been a shareholder for many years, and currently holds an 18% stake.
Furthermore, Eurazeo’s investment horizon often exceeds five years per company. Eurazeo provides the companies in which it invests with the financial and strategic resources they need to ensure their long-term growth, lasting well beyond the date on which they are divested.
Diversification
Eurazeo held a quality portfolio valued at €3.5 billion as of December 31, 2009, distributed among various asset classes - unlisted and listed, as well as real estate - in which it holds a significant share of the capital, and in many different sectors, including rental cars, hotels and distribution of electrical supplies, etc. This diversity offers the Company further versatility and flexibility to cope with changes in economic conditions
Another specific characteristic: Eurazeo is one of the few professional investors to participate in all sizes of transactions - from those involving several billion euros to those requiring only tens of millions of euros in growth capital - and to seize all opportunities. This agility allows the Company to adapt quickly to market changes.
Investment capacity
Eurazeo invests its own capital. It does not want to have any structural debt at the parent company level, and consistently maintains a strong capital buffer in order to take advantage of any future opportunities, a strategy that the crisis has shown to be judicious. Eurazeo raised funds to invest in 2010 by issuing (in the spring of 2009) bonds exchangeable for Danone shares, increasing its net cash by €338 million (1). As of February 2010, the Company had over €700 million in cash and cash equivalents, and a €1 billion line of credit that is fully available until mid-2012 and available up to €875 million until mid-2013. Strengthening our investment capacity remains a goal, in a market that is once again active.
Visibility, institutional image
The Eurazeo story is primarily that of a company with strong roots in the industrial, economic and political fabric of France and a long-standing institutional familiarity with all the players therein.
Eurazeo’s own story is intertwined with those of its knowledgeable, specialized, and loyal staff members, who give the Company its reputation for professionalism and honesty.
Lastly, Eurazeo is a responsible player with regard to all of its stakeholders, effective in its support of its investments, and respectful in its dealings with its banking partners.
(1) After reimbursement of a portion of the fi nancing matched to these securities.
