KKR is known as a tough negotiator. After all, the firm walked from its $8 billion deal for Harman International (NYSE: HAR), which crushed the stock by 24% on Friday.
But, as for the First Data Corp. (NYSE: FDC) transaction, KKR is certainly jazzed. Despite talk that financing had dried up, it now looks like the debt offering is oversubscribed -- at least for a $5 billion tranche (this is according to a story in Bloomberg.com). Although, to generate more demand, there was a 4% discount on the notes.
But for the most part, it looks like things should pan out and based on the stock price of First Data, Wall Street also agrees.
Does this mean things will get easier for other deals? To some degree, I think the answer is yes. Liquidity is coming back into the system and fear is dissipating.
However, I think there will still be some carnage, especially for those deals that may not have the strong fundamentals of First Data or that were aggressively priced and structured.
The Wall Street Journal [subscription required] reports that Kohlberg, Kravis and Roberts (KKR) is negotiating with banks to lend it $24 billion for its $26.4 billion deal to buy payment processor, First Data Corp. (NYSE: FDC). What's at stake here is whether last month's pause in the private equity fueled takeover market is temporarily on hold or dead for a decade.
There is a $400 billion backlog of such debt deals in the pipeline. Prior to the August pause, banks had no trouble selling the debt to hedge funds and others. But the terms -- or covenants -- of that debt were so loose that the banks were creating loans that demanded very little in the way of performance.
These so-called covenant-lite loans may soon become a thing of the past. If the Journal's reporting is correct, KKR may agree to a covenant requiring it to maintain a minimum level of earnings before interest taxes depreciation and amortization (EBITDA). Such terms used to be common in debt offerings, but the fact that there is even any debate about it, indicates how much covenant-lite debt risk is currently out in the market for which debt buyers have no protection at all.
The 18% haircut on Home Depot's (NYSE: HD) sale of its supply unit was not much of a surprise. Real estate continues to ail and the credit crunch added to the pressures. But the big test for private equity is KKR's upcoming $29 billion buyout of First Data Corp (NYSE: FDC).
Well, Barron's [a paid publication] has an excellent analysis on the deal, which will require a whopping $24 billion in debt financing and is expected to close at the end of the month.
Keep in mind that First Data already has a sizable debt load. The pricing on the new debt could sustain a material discount. If so, the lenders may need to take a write off or sell loans at a loss.
For example, First Data's interest payments may eat up most of its free cash flows. And, if the growth slows down, there could be negative cash flows.
In a restrained credit environment, this is not what lenders want to hear. In other words, I think we could see some fighting from the lenders to try to get a lower price on this deal.
According to The Wall Street Journal, another battle is beginning between private equity and the banks that loan money for big buyouts. KKR and its lenders are heatedly debating the terms of the purchase of First Data Corp. (NYSE: FDC). As the paper writes [subscription]: "They (KKR) are standing by their commitment to a public company on a certain price, which was based on the commitments from Wall Street on financing terms."
The First Data deal is worth $24 billion. Banks do not want to take a bath if they have to hold some of the debt on their own balance sheets. A default would force them to write down the loans.
The press views the growing unpleasantness between private equity firms and their banks as a sign that greed pushed the parties to do deals that would not all work. The premiums paid for many public companies were simply too high.
But, the problem is a bit more complex than that. Why the banks let private equity put so little money into most deals will also be a source of wonder. While the banks did get fees for their work, the lion's share of the upside belongs to firms like KKR. And, the imbalance is beginning to show as credit markets for these transactions disappear.
Just last week, I addressed some of the pending mergers that are being deemed at risk as far as "WILL THEY CLOSE?" and there are still some pretty large spreads between today's stock prices and the implied merger prices. That merger risk-arb is an area that has made fortunes for many funds, and it has led to many a demise. Here are some of the pending deals covered today so you can see where there is risk and where there is opportunity.
Tribune (NYSE:TRB) is perhaps one of the most frequently referred to deals. This is one that we have speculated will have a price cut. After all, would you loan Sam Zell and this company this much money when the media fundamentals are as bad as they are (and they only get worse)? Shareholders have approved the deal, but that was a given. Tribune's $34.00 buyout price has an implied return of over 20% to today's prices of $28.15, but I think a safe bet is for a lower-than-voted-on price.
First Data Corp. (NYSE:FDC) is the one of the biggest mergers pending that is still at risk. First Data is set to receive $34.00, and shares are currently at $32.51. The good news is that this KKR-led deal is MUCH better in risk-arb terms than it was two weeks ago when shares dipped to under $32.00.
Sallie Mae, or SLM Corp. (NYSE:SLM), is really perceived as being at risk. It isn't just the financing being at risk. The regulatory agencies may want this blocked as it is a quasi-agency status. If you don't think a $60.00 buyout price is a risk when the shares are at $49.05 today, then what can be said? J.C. Flowers & Co., Bank of America Corp.(NYSE:BAC) and JPMorgan Chase & Co.(NYSE:JPM), have said that legislation could kill the deal.
TXU Corp. (NYSE:TXU) is the real biggie, and still up in the air. You have to wonder why Warren Buffett wouldn't have stepped in for his WHALE OF A DEAL, particularly since he has telegraphed that he'd like to own utilities. ISS has recommended that shareholders vote in favor of the buyout.
Jon Ogg is a partner in 24/7 Wall St., LLC; he produces the Special Situation Investing Newsletter and does not own securities in the companies he covers.
There's been lots of buzz that the upcoming KKRIPO is dead. In fact, a recent report from The Times of London suggested that the offering has been postponed.
Well, maybe not. KKR has indicated that the rumor is not true.
I have to admire the optimism of KKR (hey, it's probably been a key the firm's success). No doubt, it's been a crummy time lately for private equity. There's a credit crunch. And, of course, the stock prices of Blackstone (NYSE: BX) and Fortress Investment Group (NYSE: FIG) have been miserable. It even looks like Carlyle is going to forgo an IPO for 2007.
But private equity is about the long term. And it's in bad markets where the opportunities seem to pop up, especially for those firms that are well capitalized.
A key test will be KKR's upcoming financing of the mega buyout of First Data Corp. (NYSE: FDC). If the deal can get done, there may be some hope for the KKR offering.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Nothing like seeing billionaires have a hard time. But that's the case with big-time private equity kingpins, like KKR's Henry Kravis.
Despite being the pioneer of the industry, KKR was a bit late to the IPO feeding frenzy, with arch enemy Blackstone (NYSE: BX) snagging the riches.
Interestingly enough, KKR had to report some of the misery in an updated IPO filing (which is the first amended document).
If you look at page 30, you'll find the following:
"For example, the cost of financing leveraged buyout transactions by issuing high-yield debt securities in the public capital markets has recently increased significantly. If conditions in the debt markets do not become more favorable to us in the near term, we may need to rely on financing commitments provided directly by investment banks or other sources in order to consummate pending transactions or finance future transactions. Such financing may be significantly more costly, with terms that may be significantly more restrictive, than financing that was, until recently, available to us in the public capital markets. More costly and restrictive financing may adversely impact the returns of our leveraged buyout transactions and, therefore, adversely affect our results of operations and financial condition. In addition, in the event of a prolonged market downturn, our business could be affected in different ways. Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs within a time frame sufficient to match any decreases in net income relating to changes in market and economic conditions."
Yes, it's a bummer for an upcoming IPO. Just look at the horrendous after-market performance of Blackstone. In fact, despite a strong quarterly report, the stock had a tepid performance today.
And, if KKR does have troubles financing mega deals like TXU (NYSE: TXU) and First Data Corp (NYSE: FDC), we might see the next filing for withdrawal of the public offering. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
First Data Corp, (NYSE: FDC) -- arbitrage spread widens as credit markets tighten. FDC, the world's largest processor of credit-card payments, announced on April 2 that it would be purchased by Kohlberg Kravis Roberts & Co. (KKR) for $29 billion. FDC shareholders will receive $34 in cash for each share. FDC named Michael Capellas as CEO of FDC on June 10. KKR is expected to raise $22 billion in late July to finance FDC buyout. FDC announced last night the purchase of Check Forte, a payment processor located in Brazil. First Analysis says "the acquisitions shows KKR does not plan to just split the company into pieces to pay off the debt it must incur to complete the acquisition." FDC overall option implied volatility of 18 is above 14-week average of 15 according to Track Data, suggesting larger risk.
Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
If you take a look at KKR's prospectus, the firm spends quite a bit of time hiring top-notch talent. And, as private equity deals get huge, it's now a necessity. So, this week, First Data Corporation (NYSE: FDC) said it has retained Michael D. Capellas as its CEO. The company is currently undergoing a $27 billion buyout and the suitor is KKR.
Capellas is a seasoned tech executive. Some of his prior gigs include the CEO of MCI, which he sold to Verizon Communications Inc. (NYSE: VZ). He also was the CEO of Compaq and went through the process of selling the company to Hewlett-Packard Company (NYSE: HPQ). Oh, and he serves on the board of Cisco Systems, Inc. (NASDAQ: CSCO).
In other words, Capellas certainly knows how to prep companies for exits. He also has a strong background with selling complex technologies – and that will be a big help at First Data.
Interestingly enough, he has spent some time as a senior advisor to Silver Lake Partners, which is a top-tier private equity firm.
For more information on the First Data deal, click here.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
With higher interest rates and pushback in the debt markets, it's been tougher for the private equity folks to get deals done. Just look at the recent IPO of the Blackstone Group (NYSE: BX). The stock has been, well, like a stone.
But, according to this week's Barron's [a paid service], this may be an opportunity. That is, there may be a way to arbitrage returns.
Huh? Well, many deals have a spread between the buyout price and the current stock price. Why? Since a deal has not been closed, there's a risk of a deal falling through.
With the recent general problems in private equity, there's been a widening of spreads.
These firms have top-tier private equity sponsors. And, in terms of reputation, it would not be good for them to walk away. So while the financing costs may be higher, I still think private equity firms will work pretty hard to get these deals done. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
The Washington Post thinks the recently announced deal by Silver Lake Partners and Texas Pacific Group to take telecommunications equipment maker, Avaya, Inc. (NYSE: AV), private indicates a perilous decline in credit standards. And the Post thinks this decline will contribute to the end of the takeover boom.
I always feel a bit skeptical when I read these kinds of articles. It's not so much that the logic is flawed, but the timing is often hard to pin down. I am guilty of doing the same thing myself since I wrote something similar last August. And yet the takeover boom refuses to bend to the will of the pundits.
The Post believes there are three reasons why the takeover boom has peaked:
Today, I met with a friend who is involved in a business that provides background checks on employees. He said the business is doing well -- except for the Fortune 500 customers. Why? Perhaps these companies are cutting back jobs.
Could that be the result of private equity? After all, with large amounts of capital, private equity firms are targeting mega companies like TXU Corp. (NYSE: TXU) and First Data Corp. (NYSE: FDC). What's more, private equity deals often involve job cuts.
Well, Congress is thinking about these issues and even had a hearing yesterday.
The president of SEIU (Service Employees International Union), Andy Stern, made a presentation against private equity. He thinks that most deals are too risky and are mostly quick flips -- which leads to greater income inequality.
He makes the following analogy: With the $4.4 billion in fees for the 10 largest buyout deals, Congress could provided health plans for 1 million workers.
As for the private equity point of view, there was a presentation from Douglas Lowenstein. He operates the newly formed association called the Private Equity Council.
His argument? Well, it's that the high returns generated from private equity firms ultimately benefit Americans, through pension funds, insurance companies and college funds. Private equity has also helped improve companies like Dunkin' Donuts, Toys R Us, Domino's Pizza (NYSE: DPZ), MGM Studios, and J. Crew Group (NYSE: JCG).
No doubt, private equity is becoming a political issue. Although, I think it's still not a "hot button" yet. But if we start to see more and more layoffs, it certainly could be. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
With the hoopla of the upcoming Blackstone IPO, KKR has not been getting much attention. Maybe that has been a good thing.
You see, according to a report from the AP, KKR has already scored $104.5 billion buyout deals this year (the recent $28 billion deal for First Data (NYSE: FDC) was a big help).
Even in the crazy world of private equity, this is stunning. After all, the #2 is the Texas Pacific Group, which has "only" $49 billion in deals for 2007.
Interestingly enough, the IPO process could be slowing down the activity for Blackstone -- at least for the next couple months. And with increased regulations, the drag could continue.
At the same time, KKR needs to be cautious. It's taken on a lot of volume and as valuations get steeper, the risks get more serious.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
BusinessWeek magazine recently ran an article highlighting the best private equity takeover candidates according to Goldman Sachs Group (NYSE: GS). Goldman's investment banking department ran certain proprietary screens to identify which companies would be most appealing to private equity buyers.
Private equity, which is a softer, fancier title than leveraged buyout, has become the investment style favored by many institutional investors as well as large pension funds. Many institutions are allocating 5-10% of their assets to private equity investing. It is a long term, fairly non-liquid, approach to buying, focused on re-building and growing existing businesses.
The dollar amount of recent transactions has not yet hit the ceiling and probably won't for a while. The next barrier to crack is $50 billion, then who knows how high it could go. As sensational as the headlines can be, the multi-billion dollar takeovers are not at the point of ridiculousness yet. The number one key component in analyzing a potential transaction is what is the cash flow yield? For example, the pending First Data Corp (NYSE: FDC) acquisition at $29 billion, eye-popping as it appears, actually carries a minor amount of risk. Why? Say the acquirer KKR puts down $5 billion and leverages the other $24 billion. The $24 billion can be borrowed at about 5-5.5%, but the First Data Corp existing operations yields about 8% in free cash flow, or about $2.2 billion. This cash flow will more than cover the debt service and this is all taken into account before cost-cutting measures and growth initiatives are put into place. The concept is the growing business will correspondingly grow the cash flow to $2.5-2.8 billion. Not only does this cover the debt service, but the underlying growth will enhance the value of the business as well. Then the private equity firm hopes to IPO the newly revamped company and earn large performance fees. Under normal circumstances, this is a win-win situation.
The Goldman Sachs list is interesting and covers a vast array of different businesses. From Supervalu (NYSE: SVU) to Sunoco (NYSE: SUN) to Rite Aid (NYSE: RAD), the businesses listed are basically recession-proof and high cash generators. The predictability of the businesses fits the private equity mold of "do not surprise me with volatile revenues and earnings." Keep it simple and keep it consistent.
Others on the Goldman list include AmerisourceBergen (NYSE: ABC) in the pharma services and products business, BJ's Wholesale Club (NYSE: BJ) and Electronic Data Systems (NYSE: EDS), the huge information technology and business process-outsourcing firm. All have the cash flow machine in place with decent to good growth rates fueling the businesses. All 21 companies on Goldman's list could be in play along with another 1,000 companies too.
Private equity firms will see a cash infusion of several hundred billion dollars this year and next, which when put to work should collectively represent between $1.2-1.5 trillion worth of acquisitions.So we are going to see many, many more announcements of "blockbuster" acquisitions.
The next time your broker or advisor recommends a stock to you, after asking about the PE and other usual questions, be sure to ask about the cash flow yield!!
In the next week or so, I will write another article about the coming shortage of publicly traded shares of stock to satisfy mutual fund needs. Interesting times . . .
The headlines are certainly impressive with Kohlberg Kravis Roberts & Co.paying $29 billion for First Data Corp.(NYSE: FDC). At a 26% premium to Friday's closing price, FDC shareholders should be a happy group. The dollar amount at $29 billion rings the bell as the second largest deal so far this year for a private equity transaction.
So, who is not in play? What company, regardless of market capitalization, should be looking back over its shoulder? As stunning and large as the transaction is for First Data Corp., KKR is acquiring one of the leading companies in the payments systems arena.
FDC has a cash flow -- which is the ultimate bottom line -- that will make the transaction run fairly smoothly. Massive banking and merchant relationships are in place for FDC and the new ownership structure will be a seamless change of a name on the door. Business will continue as usual. But the future for First Data could be quite exciting as it is now free of quarterly reporting and can focus on building the business, especially internationally.
As I wrote about yesterday, dynamic currency conversion (DCC) is fast approaching mainstream acceptance. Never again will travelers to a foreign country be confused by their credit card charges as all transactions will be done in the card holder's local currency. The margins and the free cash flow generated from DCC will be the new method and protocol for all acquiring banks involved and the winner, for the first time, will be the actual merchant (i.e. hotels, restaurants, etc.)
With First Data Corp.'s multiple banking and merchant relationships, it can now leverage its infrastructure and capitalize on DCC. As for KKR, the ultimate goal is to fine tune the FDC business model and re-invigorate a management team that many thought had internal strife. If the value of FDC can be doubled over the next five years we will be witnessed to another massive IPO of the "new" First Data Corp.
Remember, the key to all private equity transactions is to have planned out an exit strategy to reward the limited partners and of course, the general partners, KKR.
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BloggingBuyouts is the best resource for news, opinion, and research on the least understood, most powerful force driving financial markets today -- private equity investing. Michael Rainey, editor.
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There's been lots of buzz that the upcoming 
Today, I met with a friend who is involved in a business that provides background checks on employees. He said the business is doing well -- except for the Fortune 500 customers. Why? Perhaps these companies are cutting back jobs.
