The current difficulties in financing leveraged buy-outs, such as that for Alliance Boots, could have far-reaching implications for equities, says Daniel Stillit, analyst at UBS, in the FT’s View of the Day column. European credit markets cannot at the moment comfortably support an £11bn LBO, he says.
Stocks which have been traded as attractive on an LBO basis are less likely to benefit from the private equity “put” or LBO valuation “floor”, and this group could include Adidas, Deutsche Post, Experian, Reed Elsevier, Smith & Nephew and TNT, he notes.
But Mr Stillit believes corporate M&A deals may flourish: “Corporates currently have debt capacity and are investment-grade credits.” he says. “Such corporate buyers may no longer be outbid by private equity.”
An indication of this might come from whether the auction of Siemens’ VDO car parts business is won by Continental or Blackstone.
Mr Stillit is optimistic that large LBOs will re-emerge: “We still see the economic/governance case for LBOs as compelling and therefore expect a resumption of activity when the credit markets stabilise.
“Record amounts of private equity capital are being raised alongside new listed private equity vehicles,” he says. “This still needs to be deployed.”