Why private companies go public – and back again

07 September 2006
Why private companies go public – and back again

A number of hospitality businesses have jumped between private and public ownership in recent years. Tom Bill investigates who the real beneficiaries are.

When catering giant Aramark announced in May that it was going private for the second time in five years, UK boss Andrew Main welcomed the fact that the company's destiny was back in its own hands.

He said the £4.4b private equity-backed buyout by group chief executive Joseph Neubauer would remove it from the Wall Street spotlight that "hampered the ability to take a long view with clients".

But the move raises an obvious question: if private ownership is so advantageous, why had Neubauer originally floated the company in December 2001 after 17 years out of the public limelight?

He is not alone in flitting between public and private. Robert Zolade, chief executive of Paris-based contract caterer Elior, is on the verge of a management buyout after listing on the French stock market in 2000.

Both insist that there are sound financial reasons for the decision, but questions remain about who benefits when companies make the switch.

Food service consultant Jonathan Knight suggests that management buyouts can benefit bosses as well as shareholders. "Chief executives wouldn't go through the process unless they had some pretty good incentives," he says.

Doubts hover over the independence of non-executive directors who negotiate management buyout deals on behalf of shareholders - often across the table from chief executives who have appointed them.

Corporate Social Responsibility consultant Iona Hill says the deals can create conflicts of interest. "Absolutely, it can be all about profit. That's why the process needs to be kept in line by proper due diligence," she says.

A City source says this is now easier, with the tightening up of corporate governance laws in recent years. "It can be a tricky balancing act, but there is now huge scrutiny on non-executive directors," he says.

This extra scrutiny is designed to deter directors from "cooking the books", because, as Knight points out, "there is inevitably the temptation to let the business run a bit ragged in the run-up to a sale to get a good price".

But Mark Pacitti, private equity partner at consultancy Deloitte, says any decision to go private or public can only be made when a company has aligned its business, shareholder and management aims, not on the whim of a director. "Companies can pick and choose between public or private ownership depending on their financial life cycle," he says.

Can flotations raise similar concerns about the motives of directors? In June 2003 PizzaExpress was taken private by TDR Capital. It re-floated in November 2005 as Gondola Holdings after consolidating with Ask and Zizzi. The profit was undisclosed but, according to one City source, "You can bet it was a lot of money."

So why did PizzaExpress go from public to private and back to public in just three years?

Paul Hickman, analyst at City brokers KBC Peel Hunt, believes some things are better done in private. "TDR could take a longer-term view of the business than the stock market, which is more impatient," he says. "There was never any suggestion that the companies did not comply with corporate governance."

Speaking generally, Knight is more critical about the motives of some directors. "There is no doubt some are lining their pockets," he says. "It would be nice to say they have the interests of shareholders at heart. Shareholders are good at providing working capital, but can quickly become an irritant."

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