Nearest Exit Hard To Find In 2008

It was tough sledding last year for LBO firms looking to exit investments. Both the number of M&A exits and IPOs that came to fruition fell dramatically from the prior year, reflecting the difficult economic environment that many have described as the worst financial crisis since the Great Depression.

Thomson Reuters, publisher of Buyouts, tracked 239 M&A exits through Dec. 15, 2008 by U.S. buyout firms, down from 442 a year earlier. The 75 deals with disclosed financial terms had a total value of about $37.6 billion. The previous year’s disclosed value tally was $117.4 billion.

Part of the drop in volume can be explained by a decline in the number of deals with disclosed financial terms. It can also be explained by the size of the most recent year’s transactions. Buyouts counted only seven M&A exits with a valuation of at least $1 billion in 2008, down from 34 a year earlier.

The largest M&A exit of 2008 with a disclosed value was the sale of a 76 percent stake in Intelsat Ltd. to BC Partners Ltd.’s and Silver Lake’s Serafina Holdings Ltd. Apax Partners Inc., Apollo Advisor LP, Madison Dearborn Partners LLC and Permira Advisors Ltd. sold their stake in the satellite communications company for roughly $16 billion.

According to a source close to Madison Dearborn, the Intelsat exit helped the firm distribute a total of $1.8 billion in 2008, including dividends, a recapitalization and tax distributions. The firm distributed $1.6 billion to its limited partners in 2007.

American Capital Ltd. was the most active seller with 14 M&A exits during 2008. One of the Bethesda, Md.-based business development company’s exits was the sale of Contec LLC, a provider of cable set-top-box repair services, to Bain Capital LLC on July 16, 2008. The sponsor, formerly known as American Capital Strategies, recognized a third-quarter gain of $57 million for the exit, excluding realized gains and losses from interest rate derivatives, taxes on realized gains and foreign currency transactions. American Capital estimates the cumulative gains and dividend income realized over the life of the Contec investment at more than $120 million.

Thirty-five firms accounted for more than half of the exits (123 of 239). The other firms with at least five M&A exits including partial exits during 2008 were: The Blackstone Group LP (5), The Carlyle Group (7), Cerberus Capital Management (6), Kohlberg & Co. (5) Kohlberg Kravis Roberts & Co. (9), Madison Dearborn (6) and Riverside Co. (5).

Through Dec. 15, 2008, buyout firms found only six opportunities to exit investments by going public, a sharp drop from the 38 companies with LBO sponsors that completed an IPO in 2007. In fact, not a single IPO, sponsor-backed or otherwise, took place from late July through Nov. 20, 2008, when Grand Canyon Education Inc. came to market, pricing its IPO at $12 a share. The Phoenix, Ariz.-based operator of an online university, which is backed by Endeavour Capital, raised $126 million when it sold 10.5 million shares. However, that amount was well below the $230 million Grand Canyon estimated it would raise when it filed the papers to go public back in May.

GT Solar International Inc.’s IPO on July 25, 2008, had the highest post-offer value, roughly $2.4 billion at the time of its public offering. The Oaktree Capital Management-backed concern is a provider of photo-voltaic manufacturing equipment. Merrimack, N.H.-based GT Solar raised $500 million when it sold 30.3 million shares for $16.50 each. GT Solar’s post-offer value was comparable to the values of the top LBO-backed IPOs a year earlier.

Based on the closing price on Dec. 12, 2008, GT Solar’s total return since going public is negative 82 percent. Most of the other portfolio companies have also seen their stock prices fare poorly. Apollo Management LP’s Verso Paper Corp. unit is trading 90 percent below its IPO price while W Capital Partners’s RiskMetrics Group Inc. portfolio company is down 22 percent. Only Grand Canyon is reporting a positive return. Its stock price ended the Dec. 12, 2008, session at $12, representing appreciation of about 22 percent.