Felix Salmon

Private equity releverages with a vengeance

By Felix Salmon
August 25, 2009

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.

6 comments so far | RSS Comments RSS

Is this perhaps a form of “extend and pretend,” as you wrote about a few days ago, applied to a financial entity that the big players don’t want to fail?

Posted by Ken | Report as abusive

This article pretty much reads like a jealous journalist. How about telling JP etal you wont bail them out if/when this thing blows up. Then let them decide who and when they want to lend. Lending is not a common good to be spread around. Btw what is the “real economy” in your mind…

Posted by Mark | Report as abusive

Greed may be good but debt is better.

Posted by E L | Report as abusive

“money going into the real economy” — huh?

the LBO group is writing a check to P&G.
how much more “real economy” can you get?

Posted by q | Report as abusive

q, it’s a good point you’re making, w/r/t the $3.1B that’s going to P&G. But $900M is going to refinance the debt that itself was undertaken by two private equity giants to finance an LBO. That’s the part that hearkens back to the financial chicanery of yesteryear.

Posted by Dan Daoust | Report as abusive

dan, that’s true, but that $900M is presumably erasing $900M in debt; ie it is going to pay someone else, who will use it for something else that is unspecified and unknown in this frame. it could be real economy, it could be who knows what. but the LBOers don’t get to keep that $900M.

what this discussion often misses is that leveraged holding companies are intermediaries. they are holding companies. they can be well structured or poorly structured; they can make good or bad investments; they are fragile in that they are leveraged which may be bad. but most of the money that they borrow goes through them, not too them.

the fees and incentives associated with the LBOers are another matter; i am sure they are getting paid too well for this.

Posted by q | Report as abusive

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