Bad karma from a Euro buyout

NEW YORK (CNNMoney.com) -- Private equity is circling big targets in Europe, which could drive public animosity of the industry to a tipping point and add pressure on buyout firms already facing heat in the United States.

A private equity bid for J. Sainsbury (Charts), Britain's third-largest supermarket chain, could come any day now. Analysts estimate a bid for Sainsbury's, a well-known household name overseas, would be valued at around $20 billion, which would make it Europe's largest leveraged buyout ever.

A group of suitors including Kohlberg Kravis Roberts, Blackstone and CVC Capital Partners said in February they were considering a bid for the retailer. The UK's takeover regulator has set an April 13 deadline for them to either submit an offer or drop consideration of a bid for six months.

Private equity firms have been actively seeking out deals in Europe. Buyout firms have accounted for about 23 percent of $249 billion in European deal activity so far this year, according to M&A data provider mergermarket.

U.S. private equity firms have been active in the region for some time, but the buyout frenzy is reaching new heights as floods of cheap debt and record amounts of disposable cash have allowed firms to set their sights on ever-larger takeover targets.

"They've got to shop globally now and on a scale historically never seen before because of the amounts of money they've raised," one London-based M&A adviser said. Last year, buyout funds raised $204 billion worldwide, up 40 percent from $146 billion in 2005, according to Private Equity Intelligence.

Sainsbury's isn't the only big target private equity firms are eyeing in Europe. Alliance Boots (Charts), Britain's largest pharmacy, is also in play. Last week chairman Stefano Pessina and KKR made a $19.7 billion bid for the company.

And deals have been sweeping across using mostly borrowed funds with the aim of selling them for profit in three to five years. They achieve returns in a variety of ways, sometimes overhauling or growing a business away from the glare of the public spotlight. They also split up companies and sell off the parts.

Sainsbury's, a high-profile name in the UK, where it operates about 770 stores, is widely considered to be a property play, said Andrew Wade, retail analyst at investment banking firm Seymour Pierce. Private equity suitors likely will sell off chunks of the company's real estate portfolio, with the intention of leasing back some of the stores, he said.

Private equity firms argue they build up companies rather than strip them of their value, but they're walking a fine line as they make aggressive moves for Europe's most established firms, analysts say.

The Sainsbury's case, especially, could swing the pendulum further against private equity since the grocery store has been fairly successful turning around its business on its own over the last two years. The company reported sales results above expectations for the latest quarter.

Now some worry that greedy private equity firms will ultimately weaken the grocer by selling off its property and riddling the company with debt.

"Sainsbury's doesn't appear to need fixing. It has a change program in place and there appear to have been results," said Chris Higson, a professor in accounting at London Business School. It's unclear what the wider benefits of a buyout would be other than the private benefit to its buyers, he said.

The takeover speculation has sparked a heated debate over the merits of private equity. GMB, a UK union with more than 600,000 members, has vocally criticized buyout firms, likening them to "barbarians" and "asset strippers."

If Sainsbury's suitors come forward with a bid, they're likely to invite more animosity in Europe, which could easily spread across the pond. And for private equity's new kings of Wall Street, known for operating under the radar, any added scrutiny or interference with how they do business will be unwelcome.

Tax and shareholder issues are already rising to the surface in the U.S., where private equity has been busily scooping up one company after another, and where targets are increasingly big, public companies.

Just last week the head of the United Auto Workers union slammed private equity firms, which are sniffing around the U.S. unit of DaimlerChrysler (Charts), for lining their own pockets by "stripping and flipping."

"There is going to be public backlash. It's the deals that are about ownership change and releasing capital - and not about achieving economic efficiency - that capture attention," Higson said.

Deals, deals - and more deals