LBO activity grows on rise in equity use, market confidence and bank participation

By Cristal Cody and Sara Rosenberg

Tupelo, Miss., Nov. 10 - Leveraged buyouts appear to be on the rise in the wake of IMS Health Inc.'s plans to be taken private for $5.2 billion in cash and debt in the largest LBO of the year.

Norwalk, Conn.-based pharmaceutical and health care market data company IMS said on Nov. 6 it would be acquired for $22.00 a share in cash by private equity firm TPG Capital and the Canada Pension Plan's investment board.

In the second major LBO in a week, private equity firms General Atlantic LLC and Kohlberg Kravis Roberts & Co. agreed on Sunday to buy Northrop Grumman's TASC consulting unit for $1.65 billion.

"We're starting to see banks selectively lending again," David Benyaminy, managing principal at the newly launched New York-based middle-market private equity firm Gotham Private Equity Partners LP, told Prospect News in an interview on Tuesday.

"There's several banks that are open for business again, which makes leveraged buyouts more possible," he said. "The valuations are at more reasonable levels, and I think people are starting to feel more comfortable that we're closer to the bottom."

Today's leveraged loan transactions also appear to include more than 50% of equity, compared to up to 20% of equity in years past, he said.

"People are clearly putting in more equity than you were seeing at the peak of the cycle, Benyaminy said. "With banks opening up and private equity firms more willing to put additional equity into transactions and confidence in public market valuations coming up with improvement in the stock market, we're starting to see more confidence by investors."

However, one buyside source told Prospect News that it is still too early to determine how popular LBOs will become again after the method fell out of use during the subprime mortgage market collapse.

For now, the "availability of bank financing helps LBOs get off the ground - it's cheaper than HY debt and prepayable, both of which help make LBO arithmetic work," the source said.

"The bad economy helps bring out sellers, so sponsors surely have just been waiting for the financing window to open. It may close again post Thanksgiving," the buyside source said. "Deals look generally to be of high quality with good spreads, Libor floors, OIDs, covenants and pretty solid equity contributions - exactly what one would expect coming out of a bad credit cycle."

A sellside source said in an interview on Tuesday that the leveraged deals are a "sign that sellers are finally willing to accept lower prices/multiples."

The recent spate of LBOs also is a "sign of a return of confidence from the perspective of bank lenders and a very positive sign from the bank market."

Although the junk bond market recently has shown higher levels of activity, the sellside source was not surprised by more bank-led LBOs since a new bank deal is a leveraged loan necessity, whereas a bond transaction is not.

"The bonds will get there soon if the markets stay hot," the source said. "Sponsors have had to accept far less aggressive structures but are paying less for companies."

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