An outside observer of the LBO industry would assume that the large, high-profile deals done during the heady days of 2006 to 2008 are all doomed. In fact, these deals are all over the map, performance-wise.
A report in the October issue of sister publication Private Equity International finds that of the 10 largest LBOs done in the US and the five largest done in Europe during the “LBO boom”, many are in poor financial shape, but several have performed quite well, despite the difficult economic circumstances.
The report used Dealogic data to rank buyouts backed by financial sponsors over the specified time period, during which most of the largest-ever private equity deals were completed, thanks largely to ample leverage and funds of unprecedented size.
Notably, of the three largest deals ever, two are unambiguous successes. Number three, wireless carrier Alltel, has already been exited at 1.28 times cost of equity, and just a year after the buyout closed. Number two, hospitals group HCA, has been written up to 1.2 times cost by its sponsors, Kohlberg Kravis Roberts, Bain Capital and Merrill Lynch Global Private Equity, and is reportedly being groomed for an IPO.
Finally, car rental company Hertz, the 10th largest deal in the US with $2.3 billion in equity at risk from The Carlyle Group, Clayton Dubilier & Rice and Merrill Lynch, recently saw its equity valued at 1.9 times cost, based on its public share price.
The largest deal ever (not including the buyout of real estate trust Equity Office) is energy company TXU, and the performance indicators for this deal are ambiguous. With $8.25 billion in equity at risk, TXU’s debt is trading in the mid-70s and its equity has been written down to 50 percent of cost.
The megadeals get “scarier” from there. Number five in the US, Harrah’s Entertainment, has second-lien and guaranteed debt trading well into distressed territory. Its $5.7 billion in equity has been written down to 25 cents on the dollar.
Clear Channel Communications has senior unsecured debt trading at 44 cents and a subordinated tranche trading in the 20s. Freescale Semiconductor, backed by The Blackstone Group, TPG, Permira and Carlyle, has $7 billion in equity at risk and that has been written down to 15 cents on the dollar. However a debt analyst told PEI magazine that the company has “plenty of cash”.
The positive performance of just a few of these mega-deals no doubt gives hope to the sponsors behind the others that failure is not a foregone conclusion even for a highly leveraged company in a recession.
And the fact is, only one of the deals surveyed had a fully realised IRR to report – and that was the successful exit of Alltel. The others will be closely watched as the months tick by.