A popular press sport right now is to identify public companies that could be snatched up by leveraged buyout firms. Lots of attention being paid to perceived under-valuations, P/E ratios, lender proclivities, etc. But rather than providing a list of companies that could receive bids, let’s approach it from a different angle: How many U.S.-listed companies are certain to not generate LBO attention?
This might seem like an infinitely-ended question, but there is a hard numerical answer: 61. The common denominator is that each company either has a market cap of at least $80 billion, or is valued at more than $80 billion once existing liabilities are included.
Did I just settle on $80 billion because it is a round number that can be used for soundbite purposes? Ummm kind of, but there really is some legitimate math behind it (but no calculus, because I slept through it).
Let’s hypothesize that five firms Blackstone, Carlyle, KKR, Permira and TPG wouldbe comfortable making $2 billion equity commitments (assuming a bit of LP syndication). Then add in Apollo Management, Bain Capital and Thomas H. Lee Partners at around $1 billion each. If all of these firms were to participate in the same deal, you’dhave $13 billion in equity. Such cooperation is unlikely, but I’m assuming that Warburg Pincusand/or some other firm would help pick up the slack (like Goldman and Providence Equity did when Carlyle and TH Lee dropped out of SunGard).
Now onto leverage. S&P reports that the average equity contribution for a $1 billion-plus LBO last year was 30% of the whole transaction structure. Just using this figure, the LBO ceiling would be around $43.33 billion. But let’s use the more aggressive model of HCA, where private equity firms are contributing just around $5.4 billion of the $33 billion (16.4%). By doing so, our $13 billion equity contribution translates into $79.3 billion, which we’ll round up to $80 billion for ease of use.The 49 U.S.-listed companies with $80 billion or more inmarket cap are therefore on the “CanNot Buy” list.
But we are not done, because we have not yet accounted for assumed debt. S&P includesassumed debtin its equity-to-debt ratio, as did I in the HCA example. Unfortunately, market caps don’t. HCA, for example, has a market cap of just around $20.1 billion, not $33 billion. So we need to add any companies whose sub-$80 billion market caps are buttressed by enough existingliabilities to push their proposed LBO figures up over $80 billion. There are 12 of these, thus giving usa total of61 companies safe from LBO takeover (for now).
So Microsoft, GE, and 58 others can rest easily tonight. The rest might want to retain a banker.