Though the economy is still in the dumps, the leveraged buyout market has reverted to pre-recession form.
That’s not to say $20 billion-plus deals, which proliferated in 2006 and 2007, are back in vogue. Still, in recent months the LBO market has mounted an impressive comeback. Lenders have opened their purses, bidding battles have picked up and deal values have soared.
Too high, in the estimation of Blackstone president and chief operating officer Tony James.
“We’re routinely priced out of the market” nowadays, said James in a late October earnings call with the media. “There are some good companies that are being sold, but we just can’t get to the prices that are required.”
That’s exactly what befell Blackstone at the peak of the buyout market in 2007, when more aggressive private equity firms often outbid it.
James blamed the high prices on the “hot” debt markets. Even though it remains hard to get a mortgage to buy a house, yield-hungry lenders are “fueling a feeding frenzy” for debt tied to LBOs, he said. For bidders, that’s powerful ammunition. (Buyouts are financed with a combination of debt and equity.)
“It’s hard to believe” how swiftly the debt markets have stormed back, James observed.
On the flip side, the lofty valuations favor sellers, James said. Accordingly, Blackstone, which has sold down $1.3 billion of its holdings this year, is in talks to sell several companies it owns, including United Biscuits, the U.K.-based maker of Jaffa Cakes and Carr’s Crackers it bought in 2006 for just over $3 billion. It also aims to exit some holdings via initial public offerings.
Deal values edged into nose-bleed territory this spring, with TPG Capital’s purchase of American Tire Distributors for $1.3 billion — about 12 times cash flow. Valuations of other recent buyouts have topped 8 times. That compares with 4 to 7 times for many deals in 2008 and 2009.
Blackstone hasn’t sat on the sidelines entirely. In August it agreed to buy power-generator Dynegy for $4.7 billion, and last month it struck a $400 million deal to buy chemicals maker Polymer Group.
Even so, James remarked, Blackstone likely will commit a total of just $3 billion to $3.5 billion of equity in 2010 to buyouts.
That’s in line what it invested in 2008 and 2009, when the debt markets were stingy and it was hard to finance deals.
See Blackstone’s third quarter earnings announcement.