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British investment firm 3i is set to receive a nearly €1.1bn windfall payout from Dutch retailer Action, the latest sign that private equity owners are taking advantage of easy credit conditions to fund bumper shareholder paydays.
Action, a discount retailer majority-owned by London-listed 3i, is trying to raise €1.75bn-equivalent in new leveraged loans. These, together with €245mn of surplus cash, will be used to fund a €2bn distribution to the company’s owners through a share buyback.
The debt deal will mark one of Europe’s largest so-called “dividend recapitalisations” of recent years, a term for when lower-rated companies take on even more debt to fund a payout to their shareholders.
Private equity firms and other shareholders have been able to carry out these dividend recaps of their portfolio companies at a record rate this year thanks to plentiful demand for riskier debt from investors such as collateralised loan obligations. This has pushed down junk loan spreads — the extra borrowing cost over government debt — to their lowest level since 2018.
Private equity firms “are finding it much more difficult to exit their investments but they still need to get a return and they still need to return money to [investors],” said Jeanine Arnold, senior vice-president of leverage finance Emea at Moody’s Ratings. “One of the ways they’re doing this is with dividend recaps.”
Action’s €1.75bn deal will add to the $36bn-equivalent of loans raised for dividend recaps so far this year in European and US debt markets, according to data from PitchBook LCD. That matches the record rate of issuance hit over the same period in 2013.
Arnold added that strong demand in debt markets, combined with low interest costs relative to government bonds, had made such deals an attractive way for private equity owners to take money from companies they have not been able to sell.
The deal also helps cement the status of 3i’s acquisition of Action as one of the most successful leveraged buyouts ever.
The British private equity firm initially paid just €130mn for a controlling stake in the retailer in 2011. Since then it has returned £2.9bn to its majority shareholder over the years, before taking into account the €1.1bn payout, with the upcoming loan deal marking the eighth dividend recap since 3i’s takeover.
In October Action borrowed $1bn, which it used alongside €450mn in balance sheet cash to return money to shareholders.
“It’s not like it’s a dirty secret. The business has been a massive ride [for 3i],” said one credit fund manager. “It’s been a continuous dividend recap story.” 3i owns a 54.8 per cent stake in Action. After allowing for stakes it controls on behalf of third-party investors, it controls 85 per cent of the firm.
Action is looking to raise the majority of its new €1.75bn-equivalent loan in US dollars, tapping into even stronger demand for dividend recap deals from US-based investors.
In January alone there were more than $8bn of such deals in the US leveraged loan market, funding payouts to private equity firms such as Blackstone and Apollo.
In Europe, this week Germany-based BestSecret, a subsidiary of Permira-backed German retailer Schustermann & Borenstein, marketed a €550mn loan that will be used in part to fund a €250mn dividend. General Atlantic-owned Argus Media executed a dividend recap with a $1.2bn term loan earlier this year.
3i announced last month that it had upped its own dividend to shareholders on the back of the “remarkable growth story” of Action, while marking up the value of its 54.8 per cent stake to more than £14bn.
While Action had little over 250 stores when 3i took over the business from the Dutch retailer’s founding family more than a decade ago, it has since expanded to more than 2,600 stores in 12 countries. Last year it generated more than €11bn in net sales.
3i’s own share price has increased by more than 1,000 per cent since the 2011 buyout, with the private equity firm’s stake in Action now making up more than 60 per cent of its portfolio.