Cold Feet Aside, the Buyout Boom Has Legs [WSJ]
Private Equity Adapts Easily to Changing Reality;
Just Look at the BCE Deal, the Largest LBO Ever
July 3, 2007; Page C1
The bad news is piling up for private equity.
Investors are getting cold feet about pouring more money into bonds and loans used to fund takeovers; Congress is demanding buyout shops pay more tax; public investors are clamoring for sweeter prices on take-private transactions. Blackstone Group LP's share price is down 5.6% since its initial public offering.
The end of the buyout boom is nigh!
Not quite.
In just the past 96 hours, private equity has snared the largest buyout of all-time, the $32.6 billion purchase of Bell Canada parent BCE Inc., and the $5.15 billion play for nursing-home operator Manor Care Inc.
At moments like this, it is worth remembering the line of the glad-handing restaurateur named Pascal in the movie "Big Night." In a dark confessional, he espouses a life philosophy fit for these times. "I am a businessman. I am anything I need to be at any time."
Similarly, don't underestimate private equity's knack for making money in just about any environment. Call it feral adaptability. It's why Kohlberg Kravis Roberts & Co. was able to use an environmental group as a lever in its takeover plans for TXU Corp., a utility that was planning to build a collection of coal-belching power plants. It's why private-equity shops don't seem too worried about a Justice Department probe into potentially collusive industry practices. It's why firms like Bain Capital Partners LLC and Thomas H. Lee Partners LP have been able to win over "the Fidelitys of the world" by making them a part of the game.
"Things have been so good for so long, that when we stub our toe we're in the ER wondering what happened," says Steve Smith, global co-head of leveraged finance at UBS AG. Sitting atop some $1.5 trillion in spending power, as estimated by Morgan Stanley, private-equity players "are some of the most creative, adaptive animals on Wall Street," says Mr. Smith.
Take a closer look at how private-equity groups have handled the Department of Justice's probe into potential collusion among elite buyout firms. They've actually pivoted the reputation-sapping investigation into a profit opportunity.
For nine months, investigators have been picking through contracts and correspondence, looking for signs that buyout firms have been rigging corporate auctions by forming competition-snuffing "clubs" on buyout deals.
The Justice Department has zeroed in on specific emails and deals, including the purchase of Freescale Semiconductor Inc. and Hertz Global Holdings Inc., according to people familiar with the probe.
The buyout world's response to these potentially stirring developments: bemused shrugs. Club deals were a 2006 strategy.
One person defending the industry notes that the investigation remains centered in the Justice Department's New York office, not the more serious environs of Washington. A private suit by class-action lawyers has been dropped.
"Is it even relevant any more?" this person asked. In 2005, it took seven firms to pony up for the $11.3 billion acquisition of Sungard Data Systems Inc. This arrangement has, in Wall Street parlance, gone "old and cold."
The investigation came as the firms began raising massive new funds. These large pools now give them enough heft to do deals on their own, such as KKR's $26.4 billion buyout of First Data Corp and Carlyle Group LP's $5.15 billion play for nursing-home operator Manor Care, announced yesterday.
The elite players have effectively spun the investigation to their own advantage. Now private-equity firms keep more of the deals for themselves. Thank you, Justice Department!
Meanwhile, the firms have kept on a group of well-paid valets -- the Wall Street banks -- to lend billions of debt and equity needed to pursue solo deals. This is often done via what are known as "equity bridges" in which banks hold equity until the buyout shops can place it with other investors. It's easy to do a solo deal with the banks as such willing backstops. The banks hate these arrangements, even more so lately after getting stuck holding the bag in a few deals that couldn't get sold last week.
But private-equity firms still "have significant influence in the marketplace," says Boon Sim, Americas merger chief for Credit Suisse Group, "and they have the ability to 'persuade' the banks to provide equity bridges, which they have historically not done."
The adapting doesn't stop there. When big institutional shareholders began griping that private-equity firms were getting companies on the cheap, the buyout shops rolled out a plan to pay them more in so-called stub equity.
Used in the buyout of Clear Channel Communications Inc. by Bain and Thomas H. Lee, the stub equity will give common shareholders a slice of the newly private company in the form of less-tradeable stock. It took months to coax the concessions out of the buyers, but they eventually figured out a path that could help close the deal. "They came up with a way to pacify the Fidelitys of the world," says Mr. Sim of Credit Suisse.
It's all worth keeping in mind as the market hits its rough spots. Roger Altman, chairman of Evercore Partners points out, for instance, that by any historical measure, the interest rates for junk bonds remain very cheap.
Barring a very steep climb in rates, Mr. Altman says, private equity "is a permanent feature of the capital markets. Nothing foreseeable can change that." |
