Reuters Breakingviews has an article, Big Leveraged Buyouts May Soon Make a Comeback (via NYTimes.com), on the potential for a return of big LBOs. Breakingviews attributes the possibility to the availability of capital:
The money certainly has become available. In addition to dry powder held by the biggest private equity firms, banks are eager to lend again — even without demand from collateralized loan obligations to stoke the buyouts. Bubble accoutrements, including prearranged financing packages and loans with fewer restrictions, have re-emerged to make deals easier and more tempting for buyout firms. Interest rates also remain near record lows, and fixed-income investors have rediscovered an appetite for risk.
Debt multiples are also swiftly on the rise. After surpassing 10 times Ebitda in the heady days of 2006, banks beat a hasty retreat. But they’re again offering more than six times Ebitda. In return, they’re requiring buyout firms to provide 40 percent of a leveraged buyout price as equity, more than during the earlier exuberance.
What would the anatomy of a big LBO look like?
Consider a hypothetical $10 billion deal using rough-and-ready figures. A private equity firm could borrow about $6 billion for a company with $1 billion of annual Ebitda and well under $1 billion of existing debt. To write the accompanying $4 billion equity check, buyout firms could team up — in another replay from yesteryear — or bring co-investors in. Then, of course, the buyout price would have to deliver a premium to the target company’s market value.
Breakingviews has a few “plausible” candidates:
The online educator Apollo Group, the engineering group Fluor, the navigation technology maker Garmin, the discount retailer Ross Stores and the hard-drive manufacturer Western Digital are among firms that fit the bill, at least on paper. The $10 billion buyout may not become a regular occurrence again anytime soon. But what was recently unthinkable now looks in the realm of the possible again.
WDC is worthy of further investigation. Prima facie, it’s not an LBO candidate because it’s a technology stock. That said, Silver Lake Partners’ $2b buy-out of Seagate Technologies, Inc. in 2000 would suggest that it’s possible to take a hard disk drive maker private and succeed. Here’s a nice case study on the Seagate buy-out (.pdf). The caveats are well covered in this post by The Fallible Investor, which, coincidentally, skewers Garmin (see also Bronte Capital’s post for further general background).