Mergers and Acquisitions
Postmortem: Nearly as Many Cancelled Mergers as New Ones
Deal Journal readers, welcome back from the Thanksgiving weekend. Let us catch you up on things in the deal world.
Monday’s disheartening statistic du jour comes from Thomson Reuters, which totted up the effect of last week’s abandoned $188 billion offer for Rio Tinto by BHP Billiton. (Deal Journal puts the acquisition priced of that deal at $66 billion, but Thomson Reuters includes in the price the Rio Tinto debt BHP would have assumed in a deal.)
By that counting, the collapse of the BHP-Rio Tinto deal pushed the seesaw of merger volume to a rarely-seen balance: the value of busted mergers in the fourth quarter is nearly equal to the value of the mergers that were signed.
According to Thomson Reuters data, there have been $322 billion of withdrawn M&A deals in the fourth quarter, compared with $362 billion of announced deals. For every 100 mergers or acquisitions announced in the fourth quarter, seven were called off.
It probably won’t stop there. There are some gigantic proposed deals still very much on the wire. The squeeze in the credit markets has made it highly unlikely that Swiss pharmaceuticals giant Roche Holding will find banks willing to underwrite the $45 billion loan it needs to buy the majority of Genentech it doesn’t already own. The $42 billion takeover of BCE may be scuttled by an accounting firm’s preliminary opinion that the parent of Bell Canada wouldn’t be solvent after the deal.
Investment banks are already awash in losses and will dearly miss the accompanying lost merger fees. The BHP-Rio deal alone would have meant $304 million in fees spread out across a coterie of 16 banks including UBS, BNP Paribas, Goldman Sachs Group, Gresham Partners, Lazard, HSBC Holdings, Merrill Lynch and Citigroup, Rothschild, Deutsche Bank, Macquarie Group, Societe Generale, Morgan Stanley, JP Morgan Cazenove, Credit Suisse Group and Royal Bank of Scotland Group.
Of course, what the banks lose in merger fees on busted deals they often gain in peace of mind. A dead deal, after all, means that the banks don’t have to underwrite tens of billions of dollars of loans for which there are few buyers.
Downturn Will Hit Half of Buyouts, Bankers Say
Jennifer Bollen, of Financial News, files this dispatch from the private-equity world. Financial News is a Dow Jones publication and a contributor to Deal Journal.
Half of all private-equity buyouts completed in the past three years may run into trouble, according to leveraged finance bankers, signaling growing fears over the industry’s ability to pull through the economic downturn without substantial casualties.
Peter Jaffe, head of restructuring at JP Morgan in London, said he would not be surprised if half the buyouts completed in the past three years encountered problems. “Fundamentally, companies have been overleveraged,” he said. “The outlook is so poor, credit is no longer available anywhere near the way it was before, so deleveraging has to take place.”
Speaking at the Debt Brief Europe conference organized by Private Equity News, Financial News’ sister publication, last week, many of the U.K.’s top leveraged finance practitioners predicted an unprecedented level of pain for private equity-owned companies.
“If anybody who runs an investment portfolio tells you they have no problems in it theyre a bare-faced liar,” said Ryan McGovern, investment director at Nomura Mezzanine, a Japanese debt provider. “One of the problems is everyone is looking into a black hole of economic morass.”
Rating provider Moody’s Investors Service expects the five-year global high-yield default rate to more than triple to 35.1% by 2013 from 10.2% in September. The market already has started to turn, with a pick up in private-equity-backed companies breaching covenants, requesting waivers or restructuring their debt arrangements, according to Standard & Poors.
The comments follow some of the first examples of pain at private equity-owned companies. S&P found that in the 12 months ended Oct. 30, there was a 100% increase in covenant breaches, waiver requests or related restructurings among speculative-grade industrial companies in Europe, compared with the prior 12-months. These companies are also running into difficulties more quickly, with the time from financing to experiencing problems with covenant tests decreasing considerably in the past two years when compared with 2006, according to S&P.
Recent examples include French clay tile and brick company Terreal, owned by private equity group LBO France, which last week breached the terms of its 915 million ($1.2 billion) loan, U.K. furniture retailer MFI, which entered administration for the second time last week and is understood to have put its former owner Merchant Equity Partners at risk of losing £100 million ($105 million).
“Six months ago, my U.K. portfolio was 20 investments and we assumed maybe five of them might be affected. Now, you have got to assume every single one is, and if people havent got around to that yet that has got to be the number one priority,” said Steven Clarke, head of UK direct investment at mezzanine provider Intermediate Capital Group.
Some bankers added that low prices on offer in the secondary debt market were an accurate reflection of the condition of many portfolio companies. “If we are reliant on institutional funds to buy debt over 2009, there is a problem with the secondary prices being where they are,” said Iain Purves, head of leveraged finance at Bank of Scotland. “Institutions are not going to be buying this debt and I personally do not see why everyone thinks the secondary market is such great value.”
He added that investors faced high default rates and would be likely to generate a 20% recovery rate on secondary debt rather than a suggested 50%.
UPDATE 1-Blackstone invests in India-based IT company
UPDATE 1-Waratah accepts richer C$103 mln Mineralogy bid
EU mergers and takeovers (Dec 1)
UPDATE 1-Fairfax to buy rest of Northbridge for C$686 mln
REUTERS SUMMIT-Time Warner Cable CFO says Charter isn't cheap
UPDATE 1-Ford reviewing Volvo options, including sale
Deals of the Day: The Deals of Citigroup
Compiled by Stephen Grocer and Heidi Moore
Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. You can bookmark Deal Journal for easy visiting throughout the day at http://blogs.wsj.com/deals.
Today in BailoutsGM and its board are racing to craft a plan to win a federal rescue loan, a last-ditch effort to avoid a bankruptcy filing. [WSJ]
Across the pond: The U.K. government must reconsider the terms of the banking bail-out if it wants to see an increase in lending to small businesses.[Daily Telegraph]
Mergers & AcquisitionsSlimming down Citi: Citigroup is selling NikkoCiti Trust & Banking Corp., a small business in Japan dealing with custody administration. [WSJ]
Related: And yet, Citigroup Infrastructure Partners is paying $10 billion for Spanish highway operator Itinere, owned by Sacyr Vallehermoso. [Associated Press]
Finally, AIG sells something: AIG sold its private bank to an Abu Dhabi-based firm for an undisclosed amount. [WSJ]
Roche-Genentech: So Roche was trying to get a $45 billion loan to buy Genentech, if you remember. The credit markets are all, “good luck with that.” [Reuters]
Sumner Redstone: He sold control of Midway Games in order to ease his debt crunch. [WSJ]
HBOS: A group of Scottish businessmen is mounting a legal challenge to the Government’s controversial decision to allow HBOS to be taken over by Lloyds TSB without referring the deal to the Competition Commission. [Times of London]
Baby come back: Ryanair launched a $950 million bid for unprofitable Irish airline Aer Lingus, two years after Ryanair first made a bid. [WSJ]
Woolworths: Deloitte will meet with Woolworths’ potential rescuers with a deal hoped to be done by the end of the week. Over the weekend Theo Paphitis emerged as a potential bidder.[Times of London]
Barcelona: The city’s soccer team, the third-richest in the world, has a 90% chance of winning co-ownership of a Major League Soccer franchise in Miami. [Bloomberg]
Financial InstitutionsBlitzing into banking: Morgan Stanley is exploring ways to increase banking deposits, including acquisition of regional banks. [WSJ]
In a world where debt is scarce…: Large investment banks are flexing their debt muscle to try to push smaller boutique M&A advisory firms out of big client deals. [The Independent]
Capital MarketsBonds: Corporate bonds rallied last week, as financial firms raised funds, assisted by FDIC guarantees. [WSJ]
Related: Europe’s corporate debt market picked up a bit last week, but raising funds comes at a high price. [WSJ]
Related: Fund managers who usually buy only Treasurys are seeking permission to buy corporate bonds. [Bloomberg]
GMAC: Its “SmartNotes” bonds for individual investors now don’t look like such a smart investment. [Bloomberg]
BuysidePrivate equity: Giant endowments like those of Harvard University are rushing to sell their stakes in private equity firms. These “secondary” sales, as they are known, are driving down prices. [Bloomberg]
Tudor Investment Corp.: The firm’s $10 billion BVI Global Fund suspended redemptions as it splits into two separate funds. [Bloomberg]
Bankruptcy & RestructuringGeneral Growth Properties: The debt-laden mall owner won a two-week extension of its deadline to pay a $900 million debt, avoiding for the time being what would be one of the largest real-estate bankruptcies in recent U.S. history. [WSJ]
Dick Fuld: Is the chairman of Lehman Brothers Holdings a baddie, or a victim? The backlash against the backlash starts. [New York Magazine]
