Private equity releverages with a vengeance

By Felix Salmon
August 25, 2009
buy the drugs business of Procter & Gamble. How much of that is its own money, and how much is debt? In the wake of the blowup of so many leveraged loans, one might expect the proportion of the sale price funded by banks to be low. After all, the banks don't seem to be very keen to lend to anybody these days. But in fact, the banks are providing not half, not 75%, not even 95% of the total -- they're putting up a whopping 129% of the acquisition price.

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Warner Chilcott is paying $3.1 billion to buy the drugs business of Procter & Gamble. How much of that is its own money, and how much is debt? In the wake of the blowup of so many leveraged loans, one might expect the proportion of the sale price funded by banks to be low. After all, the banks don’t seem to be very keen to lend to anybody these days. But in fact, the banks are providing not half, not 75%, not even 95% of the total — they’re putting up a whopping 129% of the acquisition price.

Yep, Warner Chilcott not only has to put no money down to buy this asset, it also gets an extra $900 million to refinance existing debt. And there’s quite a lot of that, as you might expect from the fact that Warner Chilcott is owned by a who’s-who of the private-equity world, including Bain Capital and Thomas H Lee Partners.

This is being spun as good news. Marketplace’s Jeff Tyler interviewed Ken MacFadyen, the editor of Mergers & Acquisitions Journal:

MacFadyen sees the deal as a heartening harbinger for the banking industry.

MacFadyen: That’s a good sign to see that the lenders are active again.

Me, I’m not so heartened. I’d much rather see the banks’ money going into the real economy, where it can do some good, rather than being used to further lever up a company which was invented by private equity types and domiciled in the tax haven of Ireland.

The leads on this deal are JP Morgan Chase, Bank of America, Credit Suisse, Citigroup, Barclays, and Morgan Stanley. Remember those names, especially if and when any of them starts complaining about how little money they have to lend. Evidently they have no shortage of money if the borrower is one of their old friends in private equity.

Update: Angus Robertson has an excerpt from a Fitch report, under the headline “Investors Swarming Back Into Leveraged Finance Markets”. ‘Nuff said.

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