Even Bigger, Crazier Takeovers Are Announced as the Credit Market Crisis Kills Others

2 de julio de 2007

<body><div id="article"><p>July 2, 2007 (LPAC)--The merger-and-acquisition wave--including the predatory "leveraged takeover" part of it--rose 50% higher in the first half of 2007, from its all-time record level of 2006. These figures were announced just as the leveraged-takeover boom started to break up like an ill-designed plane at the sound barrier; the sudden credit markets crunch at the end of June caused six big buyouts to be delayed, scaled back, or cancelled on June 28-29 alone. And the ratio of debt to cash flow in buyout deals reached an all-time record 5.4 in the first five months of 2007, according to the worried Bank for International Settlements in its annual report released June 25.</p><p>Private-equity funds' leveraged takeovers totaled $568 billion in "value" in the first half of 2007. Notably, this is almost exactly equal in amount, and annual growth, to the level of U.S. mortgage-backed securities (MBS) issued, which was $557 billion. These MBS and their derivatives, known as CDOs and CLOs, are a main source of funding the leveraged takeovers--and their falling values are now sending the global credit markets into interest-rate jumps and partial seizures.</p><p>The takeover by Carlyle Group of the elderly-home operator Manor Care for $6.3 billion, is supposed to be funded 80% by Carlyle's sale of new MBS, even though Carlyle just had to give up an MBS sale, on June 28, in another planned takeover.</p><p>"The question is when, not if, the credit flows end" and the junk-debt market explodes, as Barron's 'Up and Down Wall Street' column put it July 2.</p><p>On June 30, the buyout gambling reached a suicidal high when a pension plan funded two private-equity funds in the biggest announced takeover ever, of Canada Bell (BCE) for $48.7 billion. The Ontario Teachers Pension Plan threw in roughly $4 billion of its $100 billion assets; the buyout firms, Providence Equity and Madison Dearborn Partners LLC, will put in about $3 billion. But <em>$17 billion existing debt is being assumed and $25 billion is to be borrowed by the buyers of CBE</em> , in a package supposedly to be arranged by Citigroup, Royal Bank of Scotland, Deutsche Bank, and Toronto Dominion Bank.</p><p>In other words, the debt in this monster deal will equal 7.7 times the gross annual earnings of the target company, BCE. This is almost goading the junk credit market to collapse on top of this deal, as that market has been rejecting "aggressive deals featuring debt that exceeds seven times [gross] earnings," according to <em>Leverage World</em> editor Howard Fridkin on July 2. Debt service alone will equal 6.7 times BCE's annual net earnings, or 6.7 times the money available to pay it.</p></div></body>