It looks like the climate is improving for management buyouts.
In the past couple of weeks alone, Xerox Corp. reportedly has met with at least three leveraged buyout (LBO) firms to discuss the disposal of certain assets as it attempts to raise as much as $4 billion to reduce its debt load.
And Halliburton Co. sold its Dresser Equipment Group subsidiary for about $1.55 billion in cash and assumed debt to a group that includes First Reserve Corp., Odyssey Investment Partners and Dresser senior management.
Many pros now expect the Federal Reserve’s one percentage point rate cut in January to loosen credit and help jumpstart buyout activity.
“As this economy cools down, more and more companies are evaluating internal operations, and I think we’re going to see more and more offerings of operating units that they want to dispose of,” says Michael Weiss, chairman of the corporate practice group for Pittsburgh- based Doepken, Keevican, and Weiss.
“I suspect over the next 12 to 18 months there’s going to be a loosening of credit,” he adds. “We expect as a result to see an increase in leveraged buyout activity and management buyouts.”
Last year, buyout firms participated in 283 deals worth approximately $39 billion worth of controlled transactions (the firm acquiring at least 50 percent of the company), according to Buyouts, a New York City-based newsletter. That’s a big drop from the $63 billion in deals during the prior year.
And the “moribund debt markets” were cited as the “big sticking point” for LBOs in CFO Magazine’s November article, Private Dreams.
Is the environment for buyouts finally changing? To a degree, yes.
Thanks to the Federal Reserve’s full basis-point rate cut, the junk bond market is coming back to life — albeit with a faint pulse.
On the other hand, some experts are arguing that senior bank debt remains pretty scarce and uncertainty over the economy’s prospects still makes it a difficult environment to engineer buyouts.
Certainly, the private equity sector has the dough to back management that wants to do an MBO. There’s about $200 billion in private equity on the sidelines, estimates Greg Peterson, partner at PricewaterhouseCoopers’ private equity transaction services.
Typically, MBOs work best for companies in non-cyclical businesses with plenty of cash-flow-rich operations and a pint-sized p/e ratio. If subsidiaries are being spun off as an MBO, they are typically non-core assets of the parent, as is the case with Dresser and Halliburton.
“Over half the companies in the S&P are trading off their all-time highs for over 12 months,” says Scott Sperling, managing director at Thomas H. Lee Co., the Boston-based buyout firm that led the management buyout at Snapple, which resulted in more than $100 million in personal gains for each of the beverage company’s founders. “And that makes for an interesting base of opportunity for a firm like ours.”