1999 Breaks Decade’s Deal-Volume Record –

In 1999, buyout firms were clearly in the mood to spend. But noting that the year just past set the decade’s record for buyout activity only tells half the story. In addition to participating in $61,996.03 billion worth of control transactions, buyout firms also invested billions to secure minority positions in companies-deals that are not counted in the list maintained by BUYOUTS and Thomson Financial Securities Data.

Indeed, 1999 was a year in which the term “buyout firm” became more nebulous than ever. An industry with its roots planted firmly in LBO soil ended the decade with a slew of high-profile convertible preferred share deals, many of them involving technology and telecommunications companies.

Of course, having raised a record-breaking $55.398 billion in 1998, buyout firms had to put all that equity somewhere. But with prices increasingly rich and banks as disciplined as ever, it was perhaps inevitable that buyout firms would look for investments other than traditional leveraged buyouts. “The reason [buyout firms] turned to public companies was that they faced a very difficult LBO environment,” says Mark Stephanz, a managing director at Banc of America Securities in charge of financial sponsors. “Valuations are high and the debt markets have pulled back.”

Mega-Varied Mega-Deals

Many of the most well-known firms found those investments not with moribund industrial companies in need of a turnaround, but in red-hot broadband and telecommunication companies that were starved for growth capital.

In addition, high prices in the U.S. sent many well-heeled American firms to Europe and, to a lesser extent, Asia, in search of deals.

The largest control transactions of 1999 happened in unconventional industries, in unconventional places or were structured in unconventional ways. Partnering was hot-rather than going it alone on a deal, buyout firms teamed with other financial and strategic buyers to share expertise and risk. For example, the largest domestic deal of 1999 was the $9.2 billion buyout of Browning-Ferris Industries, a waste management company, by Allied Waste Industries and a gaggle of buyout firms including The Blackstone Group, Apollo Advisors and DLJ Merchant Banking Partners.

Europe was hot, as well. In the U.K., Texas Pacific Group teamed with strategic buyers to acquire a slew of pubs, the biggest string of LBO firm-sponsored transaction in Europe to date. Hicks, Muse, Tate & Furst Inc. snapped up U.K. food conglomerate Hillsdown Holdings for $1.4 billion. The Texas giant is currently locked in a bidding war for British cookie maker United Biscuits PLC. Should Hicks Muse prevail, that transaction will be valued at approximately $2.8 billion.

Two more major European deals are in the works for 2000.

Blackstone, Texas Pacific and Callahan Associates International are attempting to buy cable assets from Deutsche Telekom AG in a deal which, should it close, may eclipse the pub transactions in size.

Clayton, Dubilier & Rice, for its part, will spend its largest equity piece ever to acquire German jet maker Fairchild Aerospace Corp. (see story p. 1).

Finally, tech was hot, to say the least. Control transactions in that space, however, were few and far between. In the third quarter, Texas Pacific completed the largest buyout in the technology sector with the acquisition of ON Semiconductor, a division of Motorola Inc.

Minority Deals Preferred

When it came to technology buyout firms largely stayed away from buyouts. Instead, the industry participated in an impressive string of very large minority transactions that many industry observers think has set a precedent for how the space will be approached going forward. Forstmann Little & Co., for example, invested more than $1.9 billion in equity buying convertible preferred shares in communications companies like Nextlink Communications Inc. and McLeod USA Inc. Hicks Muse joined Microsoft Corp. to invest $500 million in wireless broadband service provider Teligent.

Welsh, Carson, Anderson & Stowe agreed to invest $250 million in Winstar Communications Inc., yet another wireless broadband company (see story p. 18).

Kohlberg Kravis Roberts & Co. agreed to invest up to $200 million in CAIS Internet Inc., a provider of broadband services over copper lines.

But the convertible preferred share deals were not confined to telecommunications. Thomas H. Lee Co. agreed to invest $500 million-its largest equity investment ever-in Conseco Inc., an insurance and consumer-finance conglomerate. The Cypress Group LLC made its largest equity investment ever in a golf course company, committing $300 million to ClubCorp.

“One of the trends we have seen is the emergence of minority slugs,” says a general partner at one major buyout firm. “There are spaces where we believe the underlying trends are attractive, but minority deals are the only way to participate.”

Some industry observers have expressed concern that buyout firms are investing limited partner money in ways not outlined in their original fund information. They warn that some L.P.s may wonder why they invested in a buyout fund only to have the fund managers turn around and invest the money in public companies.

At least one L.P. says he feels buyout professionals are moving in the right direction with the convertible preferred share deals.

“Remember, these guys can add a lot more value than a [mutual fund] manager,” says Steve Costabile, a vice president at Credit Suisse First Boston in charge of the private funds group. “These companies generally welcome them to sit on the board.”

Costabile says the phenomenon of buyout firms buying minority positions in public companies and working with the management is essentially a reversal of the 1980s, during which buyout firms often took over a company and ousted the management. “Now it’s more like, The management is fine. The public markets don’t get it,'” he says.

Costabile adds that buyout pros have a track record of being ahead of the curve with investment strategies. “Private equity has always been at the top of the food chain,” he says. “[G.P.s] have always found ways to evolve and accomplish their goals.”

David Novak, a principal at Clayton Dubilier, said his firm’s L.P.s are mostly supportive about forays into Europe and the tech world. “Though there has been some concern expressed, our investors generally have been enthusiastic once they understand the value of the opportunities in those spaces,” he says.

If debt markets behave the way many sources expect them to, buyouts may get a bit more leverage to them in 2000. After a year in which a reticent lending community played a part in driving buyout firms toward minority deals, some industry insiders, including Banc of America’s Stephanz, predict that debt markets will return this year, and with it, an appetite for buyouts.

That, coupled with a continuing trend toward growth capital, should fuel another monumental year of deals that could make 1999’s numbers pale in comparison.