The Buyouts Deal of the Year awards are a little bit like gymnastics competitions, with points earned for both performance and degree of difficulty.
Did your deal return some capital to limited partners within the first 12 months? If so, take a point. Add another if you were forced to replace lost equity when your co-lead bailed at the last minute, and add three more if your entire transaction was predicated on a separate deal over which you had little or no control. Finally, factor in some bonus points for intangibles that impress the judges-in this case, the Buyouts editors-who rely on their guts more than on their toe boards.
All tolled, there was little question that this year’s big prize would go to The Blackstone Group’s $4.7 billion acquisition of TRW Automotive from Northrop Grumman Corp. (NYSE: NOC). It included all of the factors listed above, and also served as the year’s largest leveraged buyout in terms of sheer size.
A Long Time Ago…
The Blackstone-TRW deal was consummated in March 2003, but the ball initially began to roll 18 months earlier.
In late 2001, Los Angeles-based shipbuilder and defense contractor Northrop Grumman launched a hostile takeover bid for TRW Inc., a Cleveland-based defense contractor that also generated significant revenue from its aeronautical and automotive component units. The $5.9 billion offer was for the entire TRW package, but Northrop was primarily interested in defense assets like TRW’s satellite production business. In fact, the proposal included a caveat that Northrop would sell TRW’s auto parts business, even though it generated 64% of all TRW sales and 58% of TRW profits.
TRW management and shareholders, however, were not interested. The company’s board unanimously rejected the unsolicited bid in March 2002, at which point Northrop tried to better its chances by challenging antitrust laws in the State of Ohio.
The real breakthrough, however, came in July 2002 when Northrop upped its bid to $6.7 billion. The deal did not include TRW’s aeronautical unit which was instead sold to Goodrich Corp. for $1.5 billion but still would include the auto parts business. TRW agreed to the sweetened offer, at which point market watchers expected Northrop to begin soliciting bids for TRW Automotive. What had been kept under wraps, however, was that a pair of private equity firms had been eyeing the Livonia, Mich.-based unit since even before Northrop entered the picture.
Blackstone Group and Carlyle Group expressed formal interest just as the TRW-Northrop merger ink was drying, and acted so fast that most other potential buyers stayed away. The only competing bid came from Apollo Management and auto parts maker ArvinMeritor Inc., but the $4.5 billion bid was more than a few days late and a few hundred million dollars short.
The initial Blackstone and Carlyle bid was worth $5 billion-it later was revised downward to $4.5 billion before settling in the middle-and included a $1 billion equity portion split evenly between the two firms. It seemed that the only stumbling block would be if regulators objected to the larger TRW-Northrop merger agreement, but that all changed in early November when Carlyle got cold feet and pulled out of the deal.
Rumors immediately began to circulate that Blackstone might follow Carlyle’s lead, but the New York-based firm maintained a firm posture.
“We told Northrop that they’d have to backstop the equity if they wanted to get the deal done,” explains Neil Simpkins, a senior managing director with Blackstone. “We did not seriously consider bringing in another private equity firm.”
Northrop acceded to the request, with a promise to contribute $368 million in equity. The deal was agreed to in November 2002, and was to be financed, in part, by a $1.4 billion junk bond sale that eventually grew to $1.58 billion. The high-yield paper was sold in February 2003 (at a lower-than-expected yield), at around the same time that European Union regulators approved the transaction.
The final $4.7 billion deal was closed in March 2003. TRW Automotive filed for a $350 million initial public offering in November 2003, with half of the proceeds being used to buy back shares from Blackstone. The company opted to significantly raise its number of shares offered, and last month priced 24.1 million shares of common stock at $28 per share on the NYSE for a total IPO take of $675.8 million.
TRW stock was trading at $23.10 per share as of close of market last Wednesday.
The Envelope, Please
Neil Simpkins led the TRW deal team for Blackstone, and was aided by Joshua Astrof, Mark Johnson, Abrey Wise and Jonathan Wachter. Blackstone CEO Stephen Schwartzman also participated.
When asked if his team’s efforts deserve the Deal of the Year award, Simpkins grined sheepishly before nodding his head in an affirmative manner. “It was a large and complex deal that we had expressed interest in even before the talk of a hostile takeover,” he says. “It had a lot of moving parts, but, in the end, worked out as a great deal for us and our limited partners.”
Simpkins adds that Blackstone benefited from a downturn in the cyclical auto parts market. Moreover, he believes that the company’s relatively-depressed buyout price did not reflect all of the positive changes being made by John Plant, who took over as the group’s CEO in 2001.
“It’s hard to say you got a bargain at $4.7 billion, but it’s fair to say that it was a very fair price,” Simkins says.