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On 10 May, the UK High Court granted UK private equity firm Novalpina (now known as NOAL SCSP) acting by its managing general partner Berkeley Research Group (BRG) an injunction to block Ares Management from selling its shares in French pharmaceuticals business Laboratoire XO (LXO) until 20 May. BRG is seeking to restore ownership of the French Healthcare group to Novalpina after Ares took control of the business last week.

According to a report from the Financial Times, Ares refused to extend a change of control waiver under a €150m loan it lent to LXO (€100m drawn). The change of control was triggered by US consultancy firm BRG’s appointment to take over the running of Novalpina’s investments last summer.

“The legality of the actions taken by Ares will be vigorously challenged,” BRG said in a statement last week. “All necessary steps will be taken to ensure that the fund’s interest in LXO is restored as quickly as possible.”

Ares used a share pledge enforcement in Luxembourg to take over the asset, according to two sources close to the situation. Ares’ takeover of LXO requires a third party valuation report to set out the fair valuation of the shareholders’ equity and the legal process does not allow a sale below this valuation. LXO has communicated offers it received a few months ago, which represent the fair market value to the independent valuer, according to a source close to LXO.

Earlier this year a formal capital raise process for LXO was run by investment bank Neuflize OBC, instructed by BRG, to fund future acquisitions according to the sources close. Stanley Capital was one of the final round bidders along with Incentrum and Charterhouse.

Ares plans to use the proceeds of a potential sale to repay its facility.  Any excess proceeds that are received above the value of its drawn debt (€100 million plus accrued interest) it plans to distribute to the investors in Novalpina’s fund, according to a source close.

Novalpina bought LXO for €190 million in November 2020, according to the source close.

LXO generated €47.5m in sales, according to its 2020 report. EBITDA (53% margin) was expected to be €25m in 2020, according to a Novalpina presentation to investors in July 2020, seen by 9fin. The presentation added that it had less than €1m of capex per year (close to 100% cash conversion). Novalpina’s firm intention was to double the size of LXO during its investment period, according to the presentation.

LXO revenues in 2021 were expected to rise to €64m,  €78m in 2022 up to €103.2m in 2025. EBITDA was expected to hit €30.8m in 2021, €36.7m in 2022 rising to €47.4m in 2025. The healthcare group was expected to generate €20.6m of unlevered free cash flow in 2020, €21.8 million in 2021, €21.7m in 2022 up to €24.3m in 2025.

Last year, BRG took over the operation of Novalpina’s fund after disagreements arose between its founding partners Stephen Peel, Stefan Kowski and Bastian Lueken. BRG’s mandate is to sell the funds assets, which include LXO, Estonian gambling company Olympic Entertainment and Israeli spyware company NSO, and use the proceeds to recoup the investor’s capital.

As reported, the BRG takeover also triggered issues at other Novalpina portfolio companies. Olympic bondholders exerted pressure on BRG to return assets transferred into an unrestricted subsidiary, and threatened to enforce upon a change of control. The online business, Lithuanian land and Croatian assets were contributed as part of a consensual  A&E transaction.

Investors in Novalpina include Abu Dhabi’s Mubadala Capital, Oregon’s public retirement system, Alaska’s $81 billion permanent fund, two Yorkshire local government pension schemes and Centrica pension fund, according to the FT.

The potential loss of LXO is a blow to investors in Novalpina who are hoping to recoup the value of the fund’s assets.

One of the founding partners Stefan Kowski has openly criticised BRG for “mismanaging the fund and causing it to lose value”. Kowski said BRG refused to appoint a valuer to carry out a valuation after the partners were ousted on 9 July 2021.

In response to this Novalpina’s previous general partner sued BRG for breach of contract across four lawsuits in Luxembourg.

In turn, on February 28, BRG sued the founders Koswki, Bastian Lueken and Stephen Peel in London’s High Court for allegedly attempting to “reassert control” over the fund through these Luxembourg lawsuits.

The court dismissed BRG’s suit on April 11 which the judge said BRG cannot appeal. BRG appealed against its inability to appeal the decision, which they also lost on May 4, according to a source close.

The last valuation of the fund was carried out by EY in June 2021, which valued the fund at €2bn, Kowski said.

The previous general partner vehicle received a “priority profit share” payment of €18m in August, just before BRG took control, according to the FT. However Kowski said the “most significant” of the payments due to the founding partners had not yet been paid.

BRG is also embroiled in legal battles with NSO’s management in Israel and Luxembourg, according to a source close. BRG has reportedly appealed to the Members of the European Parliament for help on enquiries into whether NSO’s management operated the company legally. The troubled Israeli spyware business was deemed valueless by BRG, according to court documents in the London High Court case between BRG and the former founding partners.

In November last year, it was reported that Entain made a $1bn bid for Olympic Entertainment. Sources close to the situation, said it was just an expression of interest for the online assets, and no firm offer was forthcoming, as reported.

On a Q3 conference call on 16 December, Olympic Entertainment downplayed speculation that Entain was planning a $1bn bid for the group, proceeds of which would have easily covered the notes. Management said that “from a business perspective, we’ve never spoken to Entain, and they’ve never spoken to us.”

Ares said it did not wish to comment. BRG did not respond to a request for comment.

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Novalpina secures UK Court injunction to block Ares’ potential sale of Laboratoire XO

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