Barbarians Calling; Corporate Raiders Set Their Sights on Europe, Fueling a Private-Equity Boom That Is Ruffling Feathers and Reshaping Big Companies

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Byline: Emily Flynn Vencat

Europeans have always been unsettled by brass-knuckles capitalism. So it's no surprise that a recent rash of multibillion-dollar private-equity bids have caused quite a stir. Over the last few weeks, firms like Britain's J Sainsbury supermarkets and Alliance Boots pharmacy chain have become targets for American leveraged-buyout firms like Kohlberg Kravis Roberts and Blackstone, as well as homegrown players like the U.K.'s Permira. Unionists, who regularly grouse about buyout-related job cuts, have begun lobbying governments to cut the tax breaks raiders get on their massive loans. Last month, banner-toting protesters at private equity's annual conference in Frankfurt gave funds a clear message: "Slam the door as you leave the EU!"

No chance of that. Last year European private-equity funds raised $114 billion, more than double the 2004 figure. This year the number will likely rise to $130 billion. While the biggest deals are still done in the United States experts say Europe is quickly becoming one of private equity's favorite stomping grounds. Deals are cheaper, and the upside can be much higher. Not only does corporate Europe have more fat to strip, European integration has opened up the possibility for major cross-border mergers and takeovers. "Fund managers are scouring the earth for the best value deals," says Ric Lewis, CEO of Curzon Global Partners, an international private-equity fund, "And today they're finding them in the European Union."

The buyouts are increasingly controversial: German politicians routinely rail against "vulture" capitalists, and even business-friendly British Prime Minister Tony Blair recently warned funds they need to "behave responsibly." Still, there's no doubt that private equity is already bolstering corporate returns across the continent.

The chief targets so far include telecommunications and media firms, particularly those that were formerly state owned. Over the last two years, private-equity firms like 3i and Permira have snatched up VNU in the Netherlands, Eircom in Ireland, ProSienbenSat in Germany and TDC in Denmark, which remains, at [euro]13 billion, the largest European leveraged buyout ever. Industry analysts say the ailing Vodafone--the world's largest mobile operator--could be next. Already, the deals have broken down industry barriers and pushed the "bundling" of services like telephone calls, TV and broadband. As private-equity funds strip away noncore businesses and refocus the companies, experts say Europe will also likely end up with more TV channels, and lower phone bills.

Another popular play is in retail, where raiders are spinning off the real-estate portfolios of big chain stores. If the J. Sainsbury buyout comes through in mid-April, analysts say the company might sell off its stores, then lease them back, freeing up somewhere between [pounds sterling]5 billion and [pounds sterling]7.5 billion of cash. That could be used to move into nonfood sales (helping it to compete with bigger U.S. players like Wal-Mart). If the plan goes through, it will follow similar private-equity deals involving Nordea, Scandinavia's largest bank, and French department-store chain Printemps.

Private-equity financiers say these sorts of deals will help make Europe more competitive. But some shareholders aren't so sure. The J. Sainsbury deal has provoked controversy, in part because company CEO Justin King, who stands to profit from the buyout, has also had a big hand in orchestrating it (the U. …