After what felt like an extended slumber, the buyout community finally came out of hibernation in the second half of 2002, as a $19 billion fourth quarter vaulted total deal volume for the year to $42 billion – almost double what was disbursed in 2001.
Several trends helped propel last year’s activity, but the primary driver was corporate divestitures. Saddled with sagging stock prices, many corporations sold off parts of their businesses. Though restrictive lending terms forced LBO firms to cough up more equity to get deals done, the chance to buy at bargain prices with scarce competition often proved too tempting to pass up.
“As the year developed, there was a higher preponderance of what we call great’ companies [being put up for sale]…that have been extremely well received by the buyers,” says Jeff Rosenkranz, managing director and co-head of middle-market M&A with U.S. Bancorp Piper Jaffray.
Helping matters was a downward pricing shift. Final sale prices on some of the year’s largest deals gravitated below original offers, like in billion dollar-plus deals for QwestDex, Burger King and Houghton Mifflin. At the same time, buyout shops had plenty of money to spend, with some research suggesting that the buyout market had close to $100 billion of uninvested capital going into the fourth quarter.
“There are a lot of big buyout funds out there,” explains Cory Pulfrey, managing director at Morgan Stanley Alternative Investment Partners. “And when you put a couple of these guys together, you can hunt some pretty big elephants.”
The Big Guns
Not surprisingly, the hunters of last year’s “elephant” deals were usually large, experienced and well capitalized investors. LBO veteran Kohlberg, Kravis, & Roberts, for instance, accounted for three of last year’s 11 billion-dollar-plus transactions, including the $3.76 billion purchase of Legrand SA, a French electrical equipment maker that KKR purchased with the help of France-based Wendel Investissement. The deal was the largest to close in 2002. KKR also acquired seven units from Siemens AG in a E1.69 billion deal and also teamed up with Teachers’ Merchant Bank on the $1.9 billion purchase of Bell Canada’s directories unit.
Other megadeals also included a who’s who list of investors. Madison Dearborn closed a $3.2 billion acquisition of Ireland-based Jefferson Smurfit PLC. Welsh, Carson, Anderson & Stowe and The Carlyle Group teamed up for the $7.04 billion acquisition of QwestDex. And Texas Pacific Group, Bain Capital and Goldman Sachs Capital Partners joined forces to buy Burger King in a $1.5 billion deal.
Not surprisingly, eight of the 11 billion-dollar-plus transactions last year were done through a consortium of buyers. But while clubbing certainly helps get deals done, a source at one of the largest LBO firms said this approach isn’t without risk. “It remains to be seen if these deals will prove difficult on the portfolio management side,” he said. “Eagles don’t typically flock.”
Already, there are a number of buyout deals in motion that are expected to close early next year. And like the fourth quarter, this list contains a number of megadeals, including Blackstone’s $4.725 billion acquisition of TRW’s auto-parts unit; the second half of Welsh, Carson, Anderson & Stowe’s and The Carlyle Group’s QwestDex deal, valued at $4.3 billion; and Bain Capital’s purchase of Houghton Mifflin for $1.65 billion.
Robert Filek, a partner in the Transaction Services Group at PricewaterhouseCoopers, predicts 2003 will be in the “sweet-spot” for the private equity market. “It could be one of those homerun years-not necessarily as far as absolute dollar volume, but I believe next year could produce some of the best returns in a while, given the environment.”
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