With the COVID War ending and the economy reviving, the “Bigs” are ready to shower cash on leveraged buyouts priced at $10 billion or more.
CVC Capital Partners has bid $20 billion for Toshiba, the Japanese conglomerate that makes everything from hard drives to escalators. Medline Industries has hired Goldman Sachs to find it a buyer, the Wall Street Journal reported, a deal that could be priced at $30 billion.
From 2005 through 2007, private equity firms made 18 deals, each worth at least $10 billion, according to the WSJ; in the more than 13 years since, only ten have happened.
Now asset managers have $1.6 trillion in cash in their pockets, according to Preqin, a research firm. Sinking the money into headline-grabbing deals is a way not only to reach for big returns but also to establish themselves as major-league players, analysts say.
The firms might have even more money than that at their disposal, Jonathan Karen, a partner in the deal-making law firm Simpson Thacker & Bartlett, told the WSJ.
“There’s this shadow capital” that equity firms can call up from private investors, he explained. The firms give special clients the chance to invest directly into deals instead of running their money through the investment firm and paying the attendant fees.
“If you have a $10-billion fund, you might have $5 billion – or even another $10 billion – waiting in the wings,” he said.
The amount of leverage in the deals, as well as the price, is raising eyebrows.
For deals in 2020, the two-year trailing average debt multiple was seven times earnings before interest, taxes, depreciation, and amortization (EBITA), compared to 6.4 times in 2007, according to an analysis by McKinsey & Co.
Banks frown on banks lending to buyout deals with EBITA above six.
Another measure – the two-year average purchase-price multiple – has reached a record 12.8 times EBITA; in 2007, it was 9.4, McKinsey found.
TREND FORECAST: First, the “Bigs” continue to get bigger as they borrow cheap money to accelerate their takeovers.
Second, as interest rates rise, not only will the leveraged buyouts slow down as it becomes more expensive to borrow money, the higher rates go, the more difficult it will be for them to service debt payments.
