Burgeoning debt markets also are heating up the activity, notes Hamilton E. James, Blackstone’s vice chairman. When Blackstone bought TRW Automotive in 2003, the entire $4.73 billion price tag (a mix of debt, equity, and other financing) represented 4.7 times TRW’s EBITDA (earnings before interest, taxes, depreciation, and amortization). Now, says James, the debt portion alone for deals involving more-marginal auto suppliers than TRW routinely amounts to 5 and 5.5 times EBITDA.”
And there’s more where that came from. “Hedge funds are moving fast and hard into the debt arena,” says Stephen Boyko, an attorney in the Boston-based PE practice at Proskauer Rose LLP. “That’s driving pricing down on the debt slice.”
Little wonder that private equity has expanded into the largest M&A deals. “The competition in the midmarket for buyouts is intense,” says James. And “the search for value is driving the biggest firms and funds up-market.”
The successful consortia behind some of the largest private deals of the year — like MGM’s sale to Sony through Texas Pacific Group and Providence Equity Partners, or the buyout by KKR, Carlyle, and Providence of satellite company PanAmSat — are challenging conventional wisdom in the PE world.
“If I had my way, we’d just go out and raise a huge fund and not deal with a consortium,” concedes James, who, despite Blackstone’s participation, sees going solo as a more efficient way to do a deal.
Sellers and their investment-bank advisers have some reservations about the rise of the consortium deal, too, worrying that it may reduce the total number of competitors in an auction. But their concerns are fading as deal-making picks up, actually boosting the competition in deals that once would have been too large for any but strategic players.
The Return of the Roll Up?
In the view of CenterPoint CFO Whitlock, sellers may actually find PE consortia more responsive than strategic buyers. “I think boards of public companies tend to be cautious and more risk averse,” he says. For a public company, he says, any problem that may crop up during the deal can provide “a nice excuse to say, ‘I need to check with the board.’ ”
That caution persists despite the upswing in public-company M&As that began last year. “Logically, the time for companies to buy cyclical businesses is when things aren’t going well,” says Apollo’s Harris. “But that really isn’t how it works.” With stock values still low, companies have less cheap currency for deals. And while the average cash position at Standard & Poor’s 500 industrial companies is more than double the level in 1999, many companies continue to eschew acquisitions in favor of strengthening balance sheets or using buybacks to pump up share values. And the negative effect of acquisitions on credit ratings remains a concern.
Then there’s the Sarbanes-Oxley Act. “Sarbanes-Oxley has created a big disincentive for being public. And it’s not just Sarbanes-Oxley. It’s an unforgiving market where a company that stumbles is punished heavily,” according to Blackstone’s James. In contrast, taking a company private allows Blackstone and other private-equity firms to make changes out of the limelight.