GE Builds On Lead In Mid-Market Senior Loans

General Electric Co. has reached an agreement to buy one of its main competitors in the market to finance mid-sized leveraged buyouts. GE’s emergence as a front-runner in the auction of the mid-market lending division of Merrill Lynch & Co. was first reported in the November 19 edition of Buyouts.

With the purchase of Merrill Lynch Capital’s corporate finance, equipment finance, franchise, energy and health care finance units, GE Capital Commercial Finance appears to be cementing its position as the top supplier of senior debt to finance mid-market LBOs. Its Antares unit, built in large part through acquisitions, claims to be the No. 1 provider of senior loans of less than $225 million.

GE has agreed to pay between $1.02 and $1.03 for every dollar of Merrill Lynch Corporate Finance’s book value, according to a source familiar with the deal. Financial terms of the transaction were not disclosed but in a press release John A. Thain, chairman and CEO of Merrill Lynch, said the deal allows for “the redeployment of approximately $1.3 billion of capital into other parts of our business.” The transaction is expected to close in the first quarter.

The acquisition promises to “add more than $10 billion in assets and $5 billion in commitments to GE Capital Commercial Finance’s base of $260 billion,” according to the press release. “GE ended up being an aggressive buyer because they have to show growth,” our source said. “They do that through acquisitions.”

The deal takes place in a market that has seen its fair share of turmoil in the last six months. In the wake of the credit crunch, some underwriters that relied on syndication to offload senior loans have fallen by the wayside. The development has given even more market share to a handful of firms, led by GE Capital Commercial Finance, Madison Capital Funding, CIT and Churchill Financial, capable of holding loans on their books. Of late, these surviving firms have often clubbed together to underwrite mid-market debt packages used in LBOs.

Merrill Lynch put its entire mid-market commercial lending division, Merrill Lynch Capital, on the block over the summer. The goal was to raise cash to help offset huge, multibillion-dollar write-downs in its fixed-income division. The investment bank planned to wrap up the sale by the end of the year.

GE emerged as the primary bidder last month, but negotiations stalled because GE wasn’t interested in buying all of Merrill Lynch Capital. The division, based in Chicago, includes Merrill Lynch Corporate Finance, which provides senior and mezzanine loans to back LBOs, as well as three other groups that underwrite equipment, real-estate and health care debt. Merrill Lynch has decided to hold on to its real estate unit, which reportedly fetched offers at a discount to book value, according to the source.

GE greatly expanded its mid-market lending business in 2001 when it spent more than $5 billion to buy Chicago-based Heller Financial. By many accounts, GE botched the integration of that firm, and dissidents from Heller Financial bolted to start up the competitor shop at Merrill Lynch in 2002. GE was more careful with the 2005 acquisition of Chicago-based Antares, itself formed by former Heller Financial pros in the 1990s. “GE learned from its Heller mistake and did a good job of pulling in Antares,” said our source, adding that Antares has thrived as a function of the independence it’s been accorded by GE.

This deal figures to be different, however. GE is believed to me far more interested in Merrill Lynch’s portfolio of mid-market loans, estimated at more than $20 billion, than its employees. GE would likely offer jobs to a small number of top-performers, and let the rest go, according to another source familiar with the deal. GE would be “eliminating a competitor, buying up a portfolio and getting a few superstars,” our source continued. “GE is very disciplined about weeding out the people it thinks are the best.”

The auction for Merrill Lynch Capital drew interest from a handful of suitors, including a few European banks and LBO firms such as Cerberus Capital Management, J.C. Flowers & Co. and TPG. The interest from parties other than GE, particularly among the buyout firms, was said to be lukewarm.

With the additional scale, the acquisition of Merrill Lynch Corporate Finance may compel GE into doing deals at the larger end of the middle-market, leaving behind lower-middle-market shops, according to a third source at one of GE’s competitors. For this reason his firm is rooting for GE to complete the deal.