Return of LBOs
Cross-posted from today’s NYT.
by Rolfe Winkler and Jeffrey Goldfarb
Public companies have quickly become leveraged-buyout targets again. The five “take private” deals of at least $500 million announced since February outnumber the four completed in all of 2009 according to Thomson Reuters data. The surprise return of such acquisitions signifies a marked change from the acrimony that followed the last round of private equity deals.
Many buyout attempts, including those of Sallie Mae and Huntsman, came undone in ugly ways as the boom turned to bust. Private equity firms walked away or slashed offer prices, while banks performed contortions to get out of lending commitments. The pricey lawsuits, investor losses and reputational hits were supposed to mean the hurdles to taking public companies private — including board and management conflicts — would be insurmountable for some time.
But a renewed sense of greed is driving new deals. Leverage is creeping back up, with the current crop of buyouts including debt at four to five times earnings before interest, tax, depreciation and amortization. Bankers privately say packages as high as six times are on the way, or roughly what was seen in 2006-7, though lenders are demanding more equity as well. Buyout firms are itching to put cash to work. And the shareholders of target companies seem happy to cash in on the juicy takeover premiums that have been hard to come by since 2007.
Yet buyers and sellers have learned some lessons. Lower trust and higher trepidation have led to tighter contracts. Private equity firms are including more stringent financial tests. For example, Thomas H. Lee Partners’ plan to buy CKE Restaurants includes an escape clause linked to a debt-to-profit ratio.
Public companies, meanwhile, are insisting on bigger reverse break-up fees to avoid being left at the altar. Cerberus faces a $100 million penalty, 7 percent of the deal size, if it opts to walk away from the recently announced $1.5 billion purchase of DynCorp and $300 million more for a “willful breach” of the contract. Compare that to the paltry $100 million, or little more than 1 percent, Cerberus paid to slip out of a $7 billion buyout of United Rentals in 2008.
The returning deals are signals of forgiveness. But the safeguards suggest no one has yet completely forgotten the busted deals of yore.