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Training Department Structured Finance:
See Also: DBS Workshop on Corporate Financial Restructuring |
Buy-outs
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DEAL MAKING
MANAGERS FEELING UNDERVALUED BY THE MARKETS LOOK TO AN OLD OPTION:
The buy-out is back. Within the last month, the incredible split personality of the US stock market has spawned a shoal of deals in which managers of low-technology companies, disgruntled with their market valuation, have sought partners to take them private. But there is bad news for those who relished the cut-and-thrust of the late 1980s, when colourful financiers such as T. Boone Pickens and Ivan Boesky took advantage of the gap between public and private market values to raid targets. Analysts and buy-out specialists believe leveraged buy-outs of the early 21st century will be greyer, less extravagant - and safer. The companies that have taken the leap so far are small - US Can, which makes plastic and steel containers, and Cameron Ashley Building Products, both of which announced leveraged buy-outs last week, are hardly household names. But bigger and better-known companies are also examining their options, and the trend is embracing high-tech as well as "old economy" companies. Borders, the bookstore chain, Continental Airlines, and, this week, Ben & Jerry's, the ice cream company, have all raised the possibility of a buy-out. On Wednesday, Seagate, the world's largest manufacturer of computer disk drives, announced it would be taken private in a complex Dollars 20bn deal. LBOs got a bad reputation in the late 1980s, as predators put pressure on companies to do deals on unreasonable terms, financing break-up bids with junk bonds issued by the likes of Michael Milken. But LBOs did not die in the 1990s. The practice continued; it was just that the announcements - such as the spin-off to management of company subsidiaries - were less newsworthy. The phenomenon has gathered pace this year as the gulf has widened between the valuation of high-tech stocks and the old-line manufacturers and service companies. Jack Malvey, chief global fixed income strategist at Lehman Brothers, points out that some companies are now trading at three times cash flow, when the raiders of the late 1980s would have snapped up a bargain at six or seven times cash. But the rationale and structure of buy-outs have changed. "The prices are more reasonable and there seem to be more alliances with managements that have a good business reason to go private," says Brad Bloom, managing director of Berkshire Partners, the Boston-based investment firm backing the US Can buy-out. Managers' overriding desire is to realise value that they believe is being ignored by the markets. For example, US Can's stock price had more than halved in the past 12 months, hit by the slide in manufacturers' shares. But even in the high-tech sector, there are anomalies: Seagate believed its 33 per cent stake in Veritas, and the potential of its core manufacturing business, were not properly valued by Wall Street. Another factor preventing a greed-is-good explosion of LBOs is the weak state of the high-yield bond market. Most of the acquisitions of this bull market have been equity-financed, and it is getting more not less costly to issue high-yield bonds. The latest deals have a higher proportion of equity. "I would have to question how much financing is there for a gigantic LBO extravaganza over the next six months," says Mr Malvey. "But on the margin I wouldn't be surprised if you saw a few more of these transactions," he says. There is still a faint hope for those who miss the glory days of the 1980s: the financier Carl Icahn, one of the survivors of the LBO frenzy, has popped up this week buying stakes in Federal-Mogul, the car parts supplier, and food group Nabisco. |