LBOs are back, big brands go private

Low valuations, increased federal scrutiny prompting more public companies to go private


Like most equity-intensive markets, mergers and acquisition deals have been depressed for years, but one specter of the 1980s and ’90s is reemerging.

After years of sitting on their bulging bank accounts, leveraged buyout (LBO) firms started buying late last year, including one local firm that brokered a deal to take fast-food chain Burger King off the public market.

This conversion trend — especially for companies with capitalizations ranging from $5 million to $100 million — is predicted to continue throughout 2003,
fueled by depressed stock valuations and heightened federal scrutiny of public companies.

Last month, the San Francisco offices of the Texas Pacific Group paid $1.5 billion to buy Miami-based Burger King from the U.K.’s publicly traded Diageo plc.

Since August, other big-name brands
exited the public market — Qwest Communication’s directory business, TRW Automotive and the Dole Food Co.

Buyers included a who’s who of 1980s-era LBO firms, including Bain Capital, The Carlyle Group, the Blackstone Group and Hicks, Muse, Tate & Furst.

Local representatives from Texas Pacific Group and Francisco Partners declined to be interviewed.

“These companies employ the smartest minds in the business. It’s a kind of a clarion call to the rest of the equity industry that valuations have hit a bottom,” says Santa Monica-based Mergerstat LP’s Eric Moskowitz, who predicted the resurgence of private equity leveraged buyouts at the end of 2001.

Although Moskowitz was talking primarily about private corporate buyouts, he says a buying trend could spill over into the public arena.

“If that happens, 2003 could be a good year,” Moskowitz says, “this kind of thing happens once or twice a decade — it’s very cyclical.”

For many, the idea of increased LBO activity conjures Hollywood imagery perpetuated by films “Wall Street” or “Barbarians at the Gate” depicting inflated-ego dealmakers strong arming banks to underwrite debt and troubled companies to sell.

“This time around [leveraged buyouts are] not using much debt, yet, but it could go that route again,” Moskowitz says.

Recent leveraged buyouts are less leveraged, according to David Carey, a
senior writer for finance-focused The Daily Deal, who has been covering the M&A
market for more than a decade.

“You see new deals from time to time,” Carey says, “but for the last two or three years, because of the economic decline, banks have been very cautious about these deals.”

He says banks are less willing to allow an LBO firm to mortgage a company’s valuation to pay for a buyout when market valuations are low. That means buyout firms are left footing deals with their cash. And, their coffers are fat.

“A lot of money has been sitting on the sidelines just waiting to be put to work,” Carey says.

But some analysts continue to worry about LBOs repeating their reckless past.

“Wall Street is all about manias,” says Mergerstat’s Moskowitz, explaining current LBO activity is a matter of math, not mania, because the deals are not like the past hostile takeovers that garnered headlines.

“Hostile takeovers signal the top of a market,” Moskowitz says, explaining those days are past. “It’s a valuation game very simply put with [today’s] stock market at 1996 to 1997 levels, private equity players say company valuations are not going any lower.”