We said back in December that the LBO model would rival traditional M&A financing at the top end of the European market. The funds are still getting bigger and so are the bids, thanks to the magic of leverage and firms clubbing up.
Private equity consortia were not that far behind in the Auna bidding and, on the conference circuit, talk of US$20bn deals has supplanted US$10bn as the theoretical indicator of what the industry could achieve at the outer edge.
CVC Capital Partners and others have grander ambitions, however. They have taken a look at the economics of a bid for DaimlerChrysler, Germany’s fifth largest listed company with a €40bn market cap. The move is unlikely to proceed on the grounds of size, but the fact that firms have even run the numbers confirms private equity as a bona fide competitor for the very largest corporate buyers and the public markets. The largest M&A deal of the year globally is Proctor & Gamble’s US$57bn bid for Gillette.
The knee-jerk response from the leveraged finance bankers that have financed private equity’s march into the big time is that a deal of this size is impossible, even using global liquidity.
“Sounds like a pipe dream to me. As for autos, the prospect of retiree benefits and weak profitability makes me question if you ever get beyond the ‘what if’ stage’,” said a head of leveraged finance in New York.
“It is possible, but the equity slug would have to be so enormous that there might not be enough values in the returns,” said a European banker.
Delve deeper, however, and the scenario is not as outlandish as it sounds. That is especially true if buyout firms team up and show some flexibility around the equity contribution, which in large European buyouts tends to vary between 25% and 30%. If private equity firms cut that €40bn target in half, bankers say, it is possible that the debt markets might be able to accommodate them. That may not be exactly what buyout firms sitting on a wall of money want to hear, but one €15bn – €20bn buyout could allow another, in the right circumstances.
The right valuation, management team and rating are implicit to any successful raid by private equity on a blue chip European company. And private equity buyers must think they have identified several such scenarios, as bankers report soundings on a number of jumbo buyout candidates that have not been disclosed in the press.
But the final verdict rests with debt investors. SunGard’s loan and bond syndication confounded the critics. The cost of financing increased on Wind, however, and if Debenham’s second lien loan were unrolled this week it would break as low as 92. Now imagine all that risk multiplied to support a €20bn, or even a €40bn buyout.