For most of 2002, the leveraged buyout community seemed like the collective boy who cried wolf. Every time the market dipped, a buyout pro would insist that deal activity was about to explode due to low valuations and stocked fund caches. But, during the first half of the year, the anticipated activity spike failed to materialize.
Finally, during the dog days of summer, of all times, the wolf decided to show.
According to data from Buyouts (a sister publication of PE Week), 54 leveraged buyouts closed during the third quarter for a combined take of $10.8 billion, more than double the volume in the previous quarter and 58% higher than the year-ago period, when there were 44 deals totaling $3.95 billion.
Combined with the previous two quarters, 2002 has now seen about $20 billion worth of action, and much more is on its way. In fact, the year should finish with significantly more volume than 2001, as multibillion-dollar transactions for Burger King, QwestDex and Bell Canada Enterprises could soon close and several more mega-deals are in the works.
“Putting aside macroeconomic issues, deal flow should remain strong in 2002 and into 2003,” says Stewart Kohl, managing general partner for The Riverside Co., which closed two deals in Q3.
All this activity comes in spite of the still-tricky lending environment, which has been hampered by banking consolidation, an increase in problem loans and the sluggish economy. In many cases, buyout firms are making the always-uncomfortable decision to contribute more equity. According to Portfolio Management Data, the average equity ratio on LBOs was 40.9%, which is the highest level in recent memory.
A number of buyout firms took advantage of the prevailing weakness in the economy by targeting distressed companies and corporations looking to divest parts of their business. The corporate carve-out was a recurring theme last quarter, with large corporations like Qwest Communications, International Paper, Vivendi Environnement, Lucent Technologies, Georgia Pacific and International Multifoods among the numerous parties deciding to sell units to private equity firms.
Riverside’s Kohl says corporate divestitures thrive in this kind of economic environment. As corporations adjust their strategy to focus on their core operations, they aren’t as likely to wait out a weak market in their search for buyers, essentially taking what the market will give. That certainly isn’t the case with all sellers, as some remain hesitant to market themselves at what they feel are reduced values. However, “with the passage of time,” Kohl says, “sellers will begin to accept the new valuations, which will open the door for more deals.”
Contact Ken MacFadyen
For information on Q3 venture capital disbursements, check out www.pewnews.comon Tuesday.