Buyout Firms Return to Basics as Silver Lake Acquires Skype
Share | Email | Print | A A A
By Jason Kelly
Sept. 2 (Bloomberg) -- Silver Lake’s agreement yesterday to buy a majority stake in EBay Inc.’s Skype unit for $2 billion shows how much private-equity firms have been forced to scale back their ambitions.
The transaction offers a telling contrast to the firm’s $11.3 billion leveraged buyout of SunGard Data Systems Inc. in 2005, an early model for the debt-laden purchases that dominated LBOs until the surge ended two years later.
Private-equity investors are doing business more like they did before the market exploded, said Paul Schaye, managing director of New York-based Chestnut Hill Partners. They’re targeting divisions of larger corporations, in deals known as carve-outs, and smaller companies they may have passed over at the peak of the buyout frenzy. They’re paying a higher percentage of cash to sellers eager to unload businesses that are unprofitable or no longer suit their needs.
“You’re seeing private equity go back to its roots with carve-outs,” said Schaye, whose company helps buyout firms find deals. “There are things that have pain and need to be fixed. There are other cases where there are pieces that just need to be picked up.”
Recent carve-outs include New York-based KKR & Co.’s purchase in June of the South Korean unit of Anheuser-Busch InBev NV for $1.8 billion. Bain Capital LLC, based in Boston, and Blackstone Group LP of New York joined with NBC Universal Inc. to buy the Weather Channel for about $3.5 billion from Landmark Media Enterprises LLC last year.
Deals Shrink
The purchase of Skype, an Internet video and phone service, is the biggest private-equity deal this year, according to data compiled by Bloomberg. Banks pulled out of LBO financing as credit markets collapsed in mid-2007, leaving firms unable to make deals such as the record purchase of Texas power producer TXU Corp. by KKR and TPG in 2007 for $43.2 billion, including debt.
The LBO industry came of age in the 1970s and 1980s with carve-outs and purchases of distressed businesses. The so-called mega-deals such as TXU, in which large public companies were taken private, were an anomaly made possible by a flood of cheap financing, said Steven Kaplan, a professor at the University of Chicago’s Booth School of Business.
Nine of the 10 biggest LBOs were announced in 2006 and 2007, the lone exception being KKR’s 1989 takeover of RJR Nabisco Inc.
Back to Normal
“It’s abnormal for these guys to do the large public-to- privates,” Kaplan said. “Those only happen when the debt markets are overheated. When they’re not so accommodating, you have deals exactly like the ones you’re seeing now.”
Eight of the 10 biggest private-equity deals this year have been divestitures, according to data compiled by Bloomberg.
Private-equity firms have an estimated $400 billion of commitments from their investors for future transactions. Financing remains elusive. Some deals have been done using no debt, including the pending $571 million takeover Bankrate Inc., a North Palm Beach, Florida-based provider of personal-finance information.
Financial firms worldwide have posted losses of $1.6 trillion since the credit markets seized, with some tied to leveraged loans used to fund takeovers the banks couldn’t sell to investors. That’s made them skittish about taking on more commitments.
The market for initial public offerings, a key way for buyout firms to sell investments, is showing signs of improving. Semiconductor maker Avago Technologies Ltd. of Singapore, which Silver Lake bought with KKR in 2005, raised $745 million in an IPO last month.
Dollar General
Dollar General Corp., owned by KKR, also filed to raise as much as $750 million, taking advantage of a rebound in the equity markets. KKR, Goldman Sachs Group Inc. and other investors paid $7.3 billion to buy the Goodlettsville, Tennessee-based discount retailer in 2007.
Silver Lake, based in Menlo Park, California, led fellow private-equity firms including Blackstone and KKR to buy SunGard for an announced premium of 34 percent, according to Bloomberg data. The buyers borrowed about $7.5 billion. At the time, the Wayne, Pennsylvania-based software company was the biggest LBO since the RJR takeover.
Silver Lake is buying Skype with Andreessen Horowitz, a venture-capital firm in Menlo Park, California, headed by Internet pioneer Marc Andreessen; Index Ventures, a Geneva-based firm that invested in Skype before EBay bought it; and Canada Pension Plan Investment Board, which invested $300 million. The others didn’t disclose how much they would contribute.
Troubled Deal
EBay failed to use Skype to expand its main auction business, even as the unit’s users rose 8 percent to 480.5 million in the second quarter. The San Jose, California-based company, which bought Skype in 2005 for $2.6 billion, wrote down the value of the unit to $1.2 billion a year later.
The firms didn’t say how much debt they’d raise for the Skype purchase, which will be funded mostly with equity. JPMorgan Chase & Co. is leading a financing group that also includes Barclays Plc and Royal Bank of Canada, according to a statement yesterday.
In the Skype deal, the buyers will pay $1.9 billion in cash and will give EBay a $125 million note, the company said. EBay, which had planned an initial public offering for Skype, will retain 35 percent of the business. The deal values Skype at $2.75 billion.
“Skype will now have its own independent board that’s completely focused on Skype,” EBay Chief Executive Officer John Donahoe said in an interview yesterday. “We initiated the desire to retain a minority interest.”
The deal may play into the private-equity strategy of acquiring a company that isn’t well integrated into its former parent’s core business.
“There are lot of ways you could better monetize Skype that for some reason EBay has been unwilling to do,” said Aaron Kessler, a San Francisco-based analyst at Kaufman Brothers LP. He has hold rating on the stock and said he doesn’t own any EBay shares.
“In the right hands with the right visionaries you could get a lot more out of Skype,” he said.
To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net.
Last Updated: September 2, 2009 00:01 EDT |
