American buyout activity takes private equity into record territory

American buyout activity takes private equity into record territory
From James Doran in New York
MORE than $30 billion of deals involving private equity firms have been struck in America during the past 24 hours, cementing a record year for the industry.

Before yesterday’s flurry of deals, a record 901 private equity acquisitions, worth $289 billion (£152 billion), had been announced in the United States this year — almost double the value of deals struck in 2005 — according to data compiled by Dealogic.

That number swelled to 903 deals worth more than $320 billion yesterday as Clear Channel Communications, the largest radio station operator in the US, and Reader’s Digest Association, publisher of the world’s most widely read magazine, were sold to private equity firms.

The private equity binge in the US has been mirrored by buyouts of companies in Britain, where £63.09 billion of deals have been struck this year against £44.39 billion last year. Globally, 2,262 private equity deals worth $563.2 billion have been struck: last year, the industry sealed 2,420 deals worth $350.1 billion.

Clear Channel was sold to a consortium including Thomas H Lee Partners and Bain Capital for $37.60 a share, valuing the company at $18.7 billion, plus debt of $8 billion. The high price came after an auction against a consortium of Providence Equity Partners, Blackstone Group and Kohlberg Kravis Roberts.

Reader’s Digest Association, the owner of the world’s largest circulation magazine, agreed to a $2.4 billion deal with Ripplewood holdings. The New York-based private equity firm, with more than $1.1 billion of funds, agreed to pay $17 a share for Reader’s Digest, valuing the company at about $1.6 billion, a 10 per cent premium to its closing share price on Wednesday. The offer includes the assumption of some $800 million of debt, boosting the value of the deal to more than $2.4 billion in total.

Clear Channel and Reader’s Digest are titans of the US media industry, with massive reach and audiences to match but their shares have been in decline for years. Under private ownership they will not have to suffer the ups and downs of the market. They will also be free from many of the regulations imposed upon public companies by the Securities and Exchange Commission, the US market regulator.

Jim Chanos, chairman of the Coalition of Private Investment Companies and head of Kynikos Associates, a New York hedge fund, said that such deals are done because the market is seen as being strong enough to provide them with “an exit in the next 12 to 18 months”.

For example, a consortium of private equity firms including the private equity arm of Merrill Lynch made a return worth billions of dollars as they floated Hertz, the car rental company on the new York Stock Exchange for $15 a share valuing the company at $4.8 billion. The firms bought Hertz for $2.3 billion, plus $13 billion of debt, last December.

 

favorite quote out of this article...


Jim Chanos, chairman of the Coalition of Private Investment Companies and head of Kynikos Associates, a New York hedge fund, said that such deals are done because the market is seen as being strong enough to provide them with “an exit in the next 12 to 18 months”.

 

Buy-out mania tends to reach fever pitch at long-term market peaks. It takes time for excessive confidence and complacency to set in which allows so many larger deals to get done. The first time one of these deals gets side-tracked, the private equity and hedge funds will all want to lighten up with nobody to sell to. We'll see what happens.