By Timothy Sifert
When a
Now that the $25 billion deal is in turmoil after the buyer group tried to force a renegotiation, the transaction may be indicative of another trend: buyers exercising material adverse change (MAC) clauses to back out of LBO agreements or force down the price tag. (See related story, page 4.)
That famous stockpile of hundreds of billions of LBO-backed debt is still intimidating. And after already losing money on many of their agreements, banks no doubt have hard work still ahead. But sponsors and lenders are proving that not all deals are alike and are trying to back out of, or amend, the least savory of them by claiming material adverse changes have occurred to target companies since entering into deal agreements.
As such, deals for Sallie Mae, Harman International Industries and PHH Corp, among others, are in limbo.
The flexible nature of MAC clauses makes them difficult and costly to prove through litigation, explaining why they have rarely been invoked. And when they are brought up they often function as bargaining chips to strike more favorable terms, with buyers betting that shareholders would rather take a little less than go down the value-sapping path of litigation—or, worse yet, a blown deal.
“The world of M&A and LBOs has changed,” an M&A lawyer said. “Even though you don’t want to call a MAC, there might be few options and sellers understand in some cases that this is a predicament for renegotiating. The seller often realizes that there are more negatives [with contesting it] than with renegotiating.”
Sallie Mae’s predicament is specific, but still difficult to prove, analysts say. The buyout group has made it clear it believes that changes in the legislative and economic environment since it agreed to buy the lender are significant enough to nullify the deal. Almost all pending buyouts have been significantly disturbed by the slumping debt market, but Sallie Mae’s deal, in particular, will be affected by a new law, which the president signed last month, that stands to reduce Sallie Mae’s net income by about 2 percent annually over the next five years.
Despite knowing about the imminence of the legislation when it agreed to the deal, the buyer group has asked to reopen negotiations. Sallie Mae, for its part, has stood firm.
It is unclear what the next step will be, but the deal is indicative of a growing LBO market trend. Two weeks ago,
Should these deals get officially nullified, there are implications for banks and buyout shops, with neither party wanting to be known for wiggling out of legally binding agreements. That said, there are market participants—and not just lawyers—who laud the development.
“I’m not surprised that it is happening,” an investor said. “I think there will be less supply coming to market than people fear, either with banks stuck holding or deals not getting done. That’s a good thing.”
And it is not only the equity sponsors who are questioning their existing agreements. GE Capital Solutions’s plan to purchase PHH Corp. for about $1.8 billion is under threat because of banks’ credit problems. The PHH acquisition hinges on The
JPMorgan and Lehman Brothers, which had provided Blackstone with a debt commitment letter on March 15, recently sent Blackstone “revised interpretations as to the availability of debt financing under the debt commitment letter,” the firm stated in an SEC filing.
Blackstone has revealed to GE that the revisions could result in a shortfall of as much as $750 million in debt financing. Blackstone is exploring its financing options.
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