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Companies on the acquisition trail are starting to become more inventive in the way they approach deals.

Where competition authorities may prevent the acquisition of a direct competitor – for example, in a sector where a few players own a market share of more than 40% – trade buyers are now considering introducing a private equity house to acquire the competitor and secure a minority stake for themselves.

Though not yet a trend, this type of deal has been tried before, most famously with the proposed acquisition of Telegraph Group by DMGT and private equity group CVC in 2004. But the fact that it failed possibly demonstrates a reluctance by others to adopt it.

Indeed, this deal only delays competition issues until the private equity house sells its stake. According to Markus Golser, a partner at private equity group Graphite Capital, issues often emerge that deter a third party from such a deal. He describes it as convoluted and notes that it could restrict a private equity firm’s exit route.

“It’s not something you would normally contemplate, because it sounds very much as if it was a…tactic to allow trade buyers to get around competition rules,” Golser says. “I mean, we wouldn’t normally participate in that kind of game. For us, it’s much more relevant to make those acquisitions ourselves if we believe there is such a huge interest in doing so.

“You’re almost better off doing it in complete isolation of any sort of trade interest initially, and then make sure that you’ve got a strategic player who wants to acquire the firm when you’re ready to sell it.”

Nevertheless, James Dilley, a competition lawyer at SJ Berwin, disagrees that this kind of deal does bend competition rules. He says it could still appeal to a trade buyer by introducing horizontal agreements with the competitor, particularly if other rivals are also considering a bid.

Dilley: “The uses that it could be put to are strategic, to stop the other parties merging with that business, which might be useful if you know that the industry is consolidating quite fast and you want to stop your competitors outgrowing you.”

He also points out that a private equity firm could still take advantage of the deal’s synergies and should remember that the trade buyers would still be acquiring the competitor, or part of it, later on.

The main sticking point is how the private equity firm would sell the competitor. But to Dilley, a private equity house would never enter such a deal without some form of exit strategy. “If they think it’s a good investment, I don’t see that the risks are any different.”

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