Mega buyout deals are back. Let the good times roll again. Reports that KKR offered to buy food icon Sara Lee—subsequently rejected—evoke memories of KKR food and consumer buyouts past. Those included the 1980s purchases of Beatrice Foods and the “Mother of All Buyouts,” RJR Nabisco. The potential $12 billion deal for Sara Lee would also help signal that it is safe to do a mega-buyout deal again.
Don’t do us any favors.
The report comes several days after buyout firm Carlyle Group completed its $4 billion acquisition of NBTY, a maker and marketer of nutritional supplements. Part of the financing was provided by a syndicate of banks led by BofA Merrill Lynch, Barclays Capital and Credit Suisse, which underscore they are once again comfortable lending for mega-deals. PitchBook, which keeps score of the private equity market, confirms that billion dollar deals are back in vogue again. It counts 34 deals valued over $1 billion in the past two years alone. Of those, 25 have taken place this year, nearly triple the nine completed last year. It attributes this surge in billion dollar deals to two factors: The renewed availability of debt for buyouts and the current $425 billion capital overhang for PE funds exceeding $1 billion.
As PE equity firms and their Wall Street lenders become giddy again over these mega-deals, I hope they read the sober report Moody’s trotted out last November. It found that the top 10 private equity-sponsored leveraged buy-outs (LBOs) by transaction value have performed much worse than other private equity deals or similarly rated companies. At that time, four of the 10 had already defaulted. Moody’s also said a fifth, Energy Future Holdings Corp., was likely to be in default shortly. As it turns out, the electric utility in August completed an exchange offer of about $4.47 billion in debt for between 72 cents and 79 cents on the dollar. In response, all three major debt rating agencies downgraded Energy Future Holdings’ debt, with Moody’s and Standard and Poor’s downgrading the company to default. Of the remaining mega-deals, Moody’s noted that Clear Channel Communications, Freescale Semiconductor and Harrah’s Entertainment had undergone distressed exchanges to address their unsustainable capital structures, while Chrysler Automotive has gone into bankruptcy.
Is this any reason for Sara Lee not to do the deal? Probably not. But the folks who run the food company should consider other data from the Moody’s report. It looked at the track record of the largest private equity firms for deals initiated prior to January 1, 2008. And it’s not a pretty picture for Carlyle. Moody’s found that the debt of 11 of Carlyle’s 31 deals were in distress, defined as having a rating of B3 (negative outlook) or lower. This works out to 35 percent of its total deals, the highest percentage among all private equity firms. Another five deals—16 percent of the total—were in default. As a result, more than half (52%) of Carlyle’s deals were either in default or distress. One consolation: Three other firms were in even worse shape. They were Thomas H. Lee (55%), Apollo (65%) and Cerberus (67%). Too bad the report did not also detail how much money the private equity firms pulled out of these struggling holdings. Sellers beware.
