For most private equity players in SA, 2008 was a year to take stock and go back to the drawing board. But as it turned out, 2008 was the year Actis private equity wrote out its largest cheque.
The largest deal of 2008 by far was the Actis and Old Mutual R5,2bn acquisition of electrical engineering group Alstom SA, with black economic empowerment partners Kagiso and Tiso.
The deal, however, was not the largest Actis has ever participated in - that accolade belongs to the R8bn Alexander Forbes deal in which Actis was a significant partner. But the Alstom transaction was the largest single cheque made out by the firm.
So how did it happen? The deal is remarkable not only for its size, but also for its context. It involved a major player in the electricity distribution and transmission industry at a time when there were "load shedding" electricity cut-offs taking place all over the country.
And then, as the deal progressed, it was threatened by credit markets starting to dry up all over the world.
The participants now concede they were fortunate to get the deal away. "Really, the walls were starting to crumble around us," says Actis director John van Wyk.
Yet as everyone knows, luck is oddly dependent on practice. In 2004 Actis was involved in the purchase of Savcio, a company involved in electricity distribution and transformer repairs.
"This time we did quite a bit of work on the sector and got a better understanding of what was coming down the line on electricity distribution and the likely spending by municipalities and Eskom," says Jacob Hinson, Van Wyk's colleague at Actis.
Van Wyk agrees: "We did an enormous amount of work on trying to understand the sector better."
For Actis, a big emerging player, infrastructure spending constitutes one of its two major areas of focus, along with the consumer sector. "Across emerging markets, one of the common themes is a backlog of spending on infrastructure," says Hinson.
"Out of that we identified Alstom as a company that is actually well placed," says Hinson. Alstom has existed in SA for over a century and is affiliated to the French electricity company of the same name, though the French company now focuses on power station construction and has moved away from distribution and transmission products.
The problem with the power generation sector is that it is dominated by big players, and the capital expenditure requirements are huge. The market is also "lumpy" says Van Wyk. "You may build two power stations in one year, then nothing for some time."
The distribution network, however, covers a vast array of different products from the substation, the mini-substation, the transformers, the motors, the boilers, and all sorts of other things that make up the supply chain. "We knew this was a particularly attractive company and that it was growing very nicely," says Van Wyk.
But there were problems too. The firm had already participated in a leveraged buyout, so its owners were not only the original French company, but also management, BEE investors and the finance houses.
Luckily for Actis, the finance houses normally plan to invest for only a few years. These banks recognised an opportunity to sell, particularly since the firm had paid off its bank debts. But the other shareholders had different requirements, so juggling this pack was tricky. Eventually the process ended up as an auction - something private equity houses usually try to avoid.
However, the auction process actually favoured Actis, says Van Wyk. "Our advantage was that we had spent so much time trying to get a better handle on the industry. In an auction process, often the timelines are quite constrained, but we were well positioned to make a call on the industry quicker."
On the sidelines, electricity cuts were taking place. Newspapers were full of dire predictions that there would be load shedding for five years or more. In a way, this was ironically good news for companies such as Alstom, since the cuts underlined the need for more capacity.
Yet the power cuts were also a double-edged sword. "On the one hand, it looked like a brilliant opportunity as a particular set of circumstances had come together. But at the same time you had this incredibly negative sentiment about SA, and the feeling at the time was that anyone who wanted to invest in the country needed to have their head read."
Van Wyk says there was a concern that even though there was an opportunity to invest in transmission, how would it all be financed? And how long would it take before the power generation would come on stream and the emphasis shift to transmission and distribution?
He recalls that Actis's top brass were in SA on the day the team proposed the buyout to the investment committee. "There was quite a lot of anxiety about why we should do this. It so happened that we had put forward a set of projections for the business that were quite aggressive based on all this backlog spending."
But the question asked by Actis's investment committee was a pertinent one: why would this particular set of circumstances, which would make the Alstom investment a good deal, actually come to pass?
As it happened the front page of Business Day that day had an enormous headline about the huge investment that was coming down the track, Van Wyk recalls. "We almost didn't have to answer the question - we just took the newspaper and passed it around the table."
Says Hinson: "There is always this scepticism when it comes to government and parastatals. People ask 'how do you know they will do it when they say they will?' and so on. But we had done enough work to get our minds around the fact that the need was so dire, you could not not spend.
"With all the power generation that is coming onstream, we tend to ignore the fact that the distribution and transmission network has been overlooked for many years. There was a hiatus of spending and there was a huge underestimation of what would be needed. Even now the numbers keep getting higher and higher."
The other challenge for the buyout grouping was raising the debt for the deal in the context of an increasingly constrained market. But in the end it was underwritten by a single bank, Nedbank. "We were just very lucky," says Hinson.
