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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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January 14, 2008 12:01 AM ET
Some people might have missed it, but 2007 was a record year for mergers and acquisitions. Of course, given the doom and gloom over the credit crunch that started last summer and darkened the deal landscape even into this year, no one could really blame them for such an oversight. When polling dealmakers about what to expect in the coming months, the word “uncertainty” comes up again and again. “It’s a very dynamic year, 2008,” said Robert Schwenkel, a partner with law firm Fried Frank and head of its private equity practice. “If you were talking this time last year, you could pretty much say it’s going to be more of the same—more deals, bigger deals. Looking forward at this point, it’s difficult to have any degree of accuracy.” (To access an interactive chart detailing last year's top deals, click here). The biggest uncertainty right now: what bank balance sheets will look like once lenders have taken the last hits related to the subprime mortgage debacle—and when the last of those hits will be fully accounted for. Until that moment of clarity occurs, industry players have identified for Financial Week four of the most influential mergers and acquisitions already on the table, whose final terms and dispositions should set the dealmaking tone for 2008. These aren’t necessarily the biggest or most complex deals expected to close this year. (That would be the acquisition of ABN Amro by a consortium led by Royal Bank of Scotland, valued at an industry record-breaking $101 billion and involving no fewer than 13 banking and adviser parties thanks to a bidding war with Barclays). Still, the following deals could seriously challenge the debt markets, provide new pitfalls for bank balance sheets, spark political intrigue and opposition, or simply set a truly positive—or negative—tone for dealmaking in the new year. 1. Blackstone Group’s $26 billion LBO for Hilton Hotels A $9 billion issue will have the market checking into (or out of) commercial mortgage-backed securities Looming in the first quarter is the flotation of roughly $20 billion in single-issuer commercial mortgage-backed securities to support the buyouts of Hilton Hotels, Harrah’s Entertainment, Manor Care and La Quinta. Having already been saddled with write-downs on residential mortgages and leveraged loans, banks may be forced to take hits on CMBS as well if they can’t find buyers for the securities. It’s particularly worrisome that no single-issuer CMBS have been brought to market since August, so there are no assurances of how receptive buyers will be. Worse, just last week Moody’s Investors Service reported that several commercial property types, including limited and full-service hotels, softened in the fourth quarter. So all eyes are on the $9 billion CMBS offering that supports the $26 billion leveraged buyout of Hilton Hotels by the Blackstone Group-controlled BH Hotels, which closed in October. The deal would be the largest CMBS issuance ever and is being led by Bear Stearns, Bank of America, Deutsche Bank, Goldman Sachs and Morgan Stanley. The deal commitment comes at a particularly precarious time for Bear Stearns. The bank wrote down $1.9 billion in mortgage investments in the fourth quarter, leading to its first ever quarterly loss. And just last week James Cayne, its legendary CEO for the past 14 years, relinquished his title and active management responsibilities. Analysts have already raised concerns over Bear’s involvement in commercial real estate. “Bear is exposed to risks in its commercial real estate,” Moody’s said in a news release last month, noting what it called “Bear’s concentrated risk from its participation in the $26 billion Hilton leveraged buyout transaction. This exposure is also large relative to the firm’s earning capacity and capital position and is another example of an elevated risk appetite at the firm.” A Bear spokesman did not return a call for comment. But if banks take another hit from yet another type of financial asset, the end of the credit crunch could prove even more difficult to predict. 2. The $48 billion privatization of Canadian telecom BCE It accounts for almost a fifth of the clogged junk pipeline The buyout backlog has been clearing up slowly but surely over the past four months through a combination of deals going to market, banks taking them onto their balance sheet or deals being scrapped altogether. At the beginning of September, the forward calendar of high-yield debt issues and leveraged loans totaled more than $350 billion, according to Fitch. That total was down to roughly $180 billion at the beginning of January. Though forward issuance is down considerably, almost one-fifth of the remainder on the calendar is related to one buyout: the $48.5 billion privatization of Canadian telecommunications company BCE by a consortium led by the Ontario Teachers’ Pension Plan. The closing of the deal has been pushed back from the first quarter of this year to the second due to regulatory hurdles, which could be a real blessing given the current state of the credit markets. “The [BCE] deal needs a lot of capital at a time when banks are saying, ‘Gee whiz, not now,’” said Bob Profusek, head of the M&A practice at law firm Jones Day. The deal for Canada’s biggest phone company is the largest leveraged buyout ever and demonstrates the aggressiveness of the Ontario Teachers’ Pension Plan, which manages more than $100 billion in investment funds. Last year, the pension manager also bought proxy advisory Glass Lewis & Co. for $46 million. The deal, which also involves buyout shops Providence Equity Partners and Madison Dearborn, is being underwritten by the already beleaguered Citigroup, along with Deutsche Bank, Royal Bank of Scotland and Toronto Dominion. If such a large issuance is absorbed successfully, it could go a long way toward calming the credit markets. 3. A Chinese-backed consortium’s takeover of 3Com This politically sensitive defense-tech takeover could fuel a foreign funding backlash Foreign buyers made up 46% of the more than $230 billion worth of U.S. mergers and acquisitions announced in the fourth quarter, according to data from Bloomberg. That doesn’t account for the almost $18 billion injected into the U.S. financial sector by sovereign wealth funds in that time. And while the U.S. has thus far been open for business, the buyout of 3Com by Bain Capital and China’s Huawei Technologies could provide a political litmus test on what types of investments and investors are most welcome. The $2.2 billion deal is relatively small, but it drew the attention of the U.S. Committee on Foreign Investment over concerns it may pose a threat to national security due to 3Com’s role as a provider of intruder prevention software. Huawei would own just a 16.5% stake, with the option to increase it by another 5%, and have only a passive investment role; Bain would hold the remainder of the stake. In October, eight lawmakers, led by Rep. Ileana Ros-Lehtinen of Florida, senior Republican on the House Foreign Affairs Committee, backed a bill that would block the buyout over security concerns. “It would be a grave error for U.S. regulators to approve a deal that permits minority ownership in 3Com by one of the least transparent companies operating in China, a firm with shadowy ties to the Chinese army and intelligence services,” Ms. Ros-Lehtinen said. There also are signs of a backlash abroad over foreign buying power. In France, President Nicolas Sarkozy vowed last week to shield French businesses from sovereign wealth funds. German chancellor Angela Merkel has lobbied for legislation to protect German businesses from them in recent months. Concerns have reached a fevered enough pitch that Wei Benhua, a senior official with China’s currency regulator, last week urged rich countries not to discriminate against sovereign funds. “The newly established [$200 billion] China Investment Corp. has been grabbing global attention and some certain countries are intentionally spreading the idea of a China threat,” Mr. Wei wrote in remarks published in the China Business News. Rather, he said, CIC would respect the laws of the countries it invests in and participate in international discussions on regulating sovereign funds. Several U.S. financial institutions have looked to the deep-pocketed sovereign funds during the credit crunch, including Citigroup, which received $7.5 billion from an Abu Dhabi fund in November, and Morgan Stanley, which received $5 billion from CIC in December. Merrill Lynch, which sold $5 billion worth of stock to a Singapore fund in December, last week was reported to be seeking another infusion of up to $4 billion from a Middle Eastern fund and Citi was said to be looking for as much as $10 billion from funds from Asia and the Middle East. To date there has been no furor over the capital injections received by U.S. banks. However, in a U.S. election year in which the economy could flirt with or fall into recession, protectionist agendas could rear their heads. 4. BHP Billiton’s $150 billion offer for Rio Tinto Call it mine over matter: Commodities boom may bring a consolidation boon, too The New Year could see some good old-fashioned industry consolidation. And it would get off to a roaring dealmaking start if mining company BHP Billiton can pull off its proposed bid for rival Rio Tinto. The $150 billion BHP offer dwarfs the biggest deal of last year and largest banking transaction in history, the RBS-led bid for ABN Amro. Indeed, the deal would be the second-biggest takeover in history, behind Vodafone’s $203 billion acquisition of Mannesmann in 2000. This month BHP must either walk away from its offer, which Rio Tinto’s board rejected in November, or launch a hostile bid. Corporate matchmaking on such a large scale could happen in several industries. High oil and natural gas prices should push consolidation in the energy sector as companies reach for economies of scale. The same goes for commodities in general. Last year saw major activity in all those spaces, including the $45 billion buyout of energy company TXU by a group led by Kohlberg Kravis Roberts and mining company Rio Tinto’s $38 billion takeover of Alcan. This year could also prove to be a big one for financial services mergers, as the credit crunch has severely depressed asset valuations. With merger volume expected to fall overall, dealmakers are banking on it. FW
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