Flurry of IPOs provides exits for some mega-buyouts; others languish

Hotel operator Hilton Worldwide returned to the public markets on Dec. 11, some six years after Blackstone Group LP took it private in a $26.7 billion transaction.

Hilton raised $2.34 billion in the deal, which valued the company at almost $20 billion and made it the biggest-ever hotel IPO. Blackstone has invested about $6.4 billion in Hilton, and the 76.2 percent stake its funds will own after the IPO are worth about $15 billion. That means the firm is on track to make more than 2.3 times its money.

Aramark Holdings, one of the big club deals from the peak of the buyout boom, completed its IPO on Dec. 12, and its sponsors, Goldman Sachs Group Inc’s private equity arm GS Capital Partners, JP Morgan Partners, CCMP Capital Partners, Thomas H. Lee Partners and Warburg Pincus, likely more than doubled their money.

Eight, or 47 percent, of the 15 biggest buyouts have now set the stage for partial or full exits through the public markets, or exited via a strategic transaction. See accompanying table. 

Meanwhile, there were two big buyouts earlier this year, namely Michael Dell and Silver Lake Partners’s going-private transaction for Dell Inc in October, and the acquisition of HJ Heinz by Warren Buffett’s Berkshire Hathaway and 3G Capital in February, neither of which is likely to be exited in the near term.

For the five remaining large deals that were done near the peak of the buyout boom, the outlook is grim.

Among the most heavily leveraged companies, these industry leaders remain heavily indebted in a sluggish economic recovery, often not generating internal growth, frequently in out-of-favor sectors, and largely unable to pay down their debt.

The leading poster child for LBOs gone wrong is the Texas electric and gas utility Energy Future Holdings Corp, history’s largest buyout deal. Taken private in October 2007 for around $45 billion in a deal led by Kohlberg Kravis Roberts & Co, TPG Capital and GS Capital Partners, the company formerly known as TXU has been flirting with bankruptcy for most of 2013, largely as a result of a collapse in natural gas prices.

Energy Future Holdings bought itself another six months to negotiate a deal when it made a $270 million interest payment in November. But a company on the brink of Chapter 11 is not the strongest candidate for an IPO.

Other companies have problems that are similar, if not as severe. Broadcaster Clear Channel Communications Inc, for example, taken private in July 2008 by Bain Capital Partners and Thomas H. Lee Partners in a $23.2 billion deal, was hit in the downturn by the shift of advertising away from traditional media and toward the Internet. Clear Channel does have a secondary business in outdoor advertising, but that also is unlikely to provide a boost for a prospective IPO.

First Data Corp, the giant payment processor taken private in September 2007 by KKR, Bain Capital and Merrill Lynch Capital in a $27 billion deal, was likewise hammered in the recession by falling card-payment volumes, and it has struggled since then as consumers have sought to pay down their debt rather than taking on more.

Medical instrument maker Biomet Inc, taken private for $9.4 billion in July 2007 by The Blackstone Group, GS Capital Partners,  KKR and TPG, has performed somewhat better but remains burdened by debt. In addition, its sector has fallen out of favor as the health care industry has wrestled with the implementation of the Affordable Care Act, also known as Obamacare.

If there is one bright spot among this group of portfolio companies, it may be SunGard Data Systems Inc, which was taken private in August 2005 in an $11.4 billion deal by Silver Lake, Bain Capital, Blackstone Group, GS Capital Partners, KKR, Providence Equity Partners, and TPG. SunGard is in a favored sector, technology, and it has achieved some returns for investors through spinoffs of non-core businesses.

Still, SunGard’s growth also has struggled, as one of its core businesses, business continuity services for disaster recovery, has been transformed by low-latency Internet “hot backup” technology, and, after eight years as a portfolio company, its outlook could be hobbled by having seven owners, all with different agendas, one investment banker said. “Nobody sits on these for eight years if they can monetize it in a meaningful way.”

(Correction: This story was corrected to clarify that IPOs do not necessarily translate into immediate full exits for sponsors.)