Monday, June 25, 2007

Where Was The "Merger Monday"........?

This could be a coincidence but i think that we really have seen the peak in merger activity. When i talk about the peak i mean in terms of the cash component. It could well be that some gigantic stock deals will pump up the total amount. But this should have not such a big impact on equities overall. The key point is that with a lower cash component fewer fresh money is flowing from credit markets back in the equity markets. And i think one should remember that the actual deals that are and will be announced soon were done when credit conditions were almost perfect. Even when this "call" is premature the buyout premiums should shrink.

Das ganze könnte natürlich auf reiner Zufall sein, aber ich denke das wir in der Tat den Höhepunkt der Fusionsaktivitäten gesehen haben. Damit meine ich den Teil der Fusionen die mit Cash abgewickelt werden. Es kann sehr gut sein das noch weitaus gigantischere Aktiendeals durchgehen und die Gesamtzahl nach oben hieven. Entscheidend aber wird sein das hier zukünftig deutlich weniger frisches Geld vom Kreditmarkt and den Aktienmarkt zurückfließt, es also mehr oder minder ein Nullsummenspiel ist. Zudem sollte man bedenken das die ganzen Deals die jetzt oder in den nächsten Wochen bekanntgegeben werden noch zu Zeiten angeleiert worden sind als das Kreditmarktumfeld perfekt gewesen ist. Selbst wenn sich die these als voreilig erweisen wollte so dürften doch in jedem Fall die Aufschläge bei den (Cash)Übernahmen deutlich leiden.

The buyout boom may be about to hit a bump.

After years of supersize private equity deals, investors in the debt that supports these transactions — the lifeblood of the industry — have begun to not so quietly push back at several prominent transactions.

Rising interest rates and tougher terms from investors may signal that private equity players will soon be struggling to continue reaping the outsize returns that have made the buyout business so lucrative.

Already a raft of bond offerings for recently announced deals, including the $7.75 billion buyout of Thomson Learning and the $7.1 billion deal for U.S. Foodservice, have been scaled back after facing resistance from investors.

This week, two other buyouts, the $4.7 billion deal for ServiceMaster and the $6.9 billion sale of Dollar General, are expected to price their bonds, and they may serve as an important barometer for a series of even larger deals to sell bonds to investors this summer.....
These setbacks come as Cerberus Capital Management begins a road show this week to sell bonds for its $7.4 billion buyout of Chrysler; it plans to raise up to $62 billion. First Data, which was acquired by Kohlberg Kravis Roberts for $29 billion, plans to price its bonds next month. And later this year, bonds for the buyout of TXU, the largest in history, will go on sale. TXU is likely to seek about $24 billion.

The resistance from bondholders may already be cooling the buyout market. The proverbial Merger Monday has not been so merger-filled lately. Yesterday, only seven deals were announced, compared with 43 a week ago and 84 on June 4, according to data from Thomson Financial.
“In the last couple of days, we’ve seen some cracks,” said Kingman Penniman, president of KDP Investment Advisors, a bond research firm. “Private equity people have for a long time now gotten funding at very low rates and very liberal terms. The market has known for a long time that this was ridiculous.”

Not only bondholders but banks themselves appear to be thinking twice before they agree to lenient financing of these huge deals.

A small correction appeared to have taken place Friday when Thomson Learning scaled back the debt offering it hoped to sell to finance its buyout by two private equity firms, Apax Partners of Britain and the buyout arm of the Ontario employees’ pension fund. Originally, Thomson, a former division of the media publisher Thomson, sought $2.14 billion; it is now seeking $1.6 billion.

“There’s not a lot of room for error in these transactions, so investors have become very cautious,” said Chris Donnelly, who tracks leveraged finance at Standard & Poor’s Leveraged Commentary and Data. “Investors have been pushed to the wall on structure. At this point, we can’t go any further.”
> European data q1 2007

Among the changes Thomson made was to eliminate a $540 million provision for a pay-in-kind toggle, a type of debt that allows interest to be paid in cash or with the issuing of more bonds. The entire offering must now be paid back in cash, and Thomson Learning agreed to add more covenants to both the loan and the bond portion of the sale.

U.S. Foodservice, a division of Royal Ahold of the Netherlands, has now twice scaled back its own debt offering to help finance its buyout by Kohlberg Kravis and Clayton Dubilier & Rice. Scheduled to go on sale today, U.S. Foodservice’s offering will now also be paid back in cash, not with the issuing of more bonds.

thanks to

Pay-in-kind debt, in particular, has fueled the buyout boom, largely because of the flexibility it affords private equity firms to pile on debt. Those instruments, proponents argue, allow companies to avoid bankruptcy.

But, according to Mr. Penniman, that debt has also loaded up many companies with potentially more debt than they can pay off.

Companies just cannot keep issuing debt, he said. “That assumes the market is pretty stupid.”

> As seen in subprime.........

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Anonymous edgar said...

These setbacks come as Cerberus Capital Management begins a road show this week to sell bonds for its $7.4 billion buyout of Chrysler; it plans to raise up to $62 billion. First Data, which was acquired by Kohlberg Kravis Roberts for $29 billion, plans to price its bonds next month. And later this year, bonds for the buyout of TXU...

The Cerberus-Chrysler deal could have a happy ending. Chrysler is experienced at making compact cars and electric cars and is pliable enough to try a new direction. The TXU takeover will end in tears for Texas utility customers and bondholders alike. They aren't adding value to TXU, it is only a quick flip with cost cutting in mind. A disaster in the making.

5:59 PM  
Blogger jmf said...

Hello Edgar,

i agree with you on TXU.

I´m not so sure about the Chrysler deal.They have to go in this direction for sure. But i Think that all other players will go the same way and have way more expertise.

The biggest problem for Chrsyler will be that they have almost zero overseas exposure unlike GM.

11:03 PM  

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