What a difference a delay makes, as the FT observed last week. The decision by Cadbury Schweppes to postpone its £7bn sale of its US drinks division because of “extreme volatility” in the debt markets came just after the cancellations of nearly £20bn in debt sales to finance the buy-outs of Alliance Boots and Chrysler.
Now, equity and debt markets around the world are still feeling the aftershocks of the week, amid fears that the private equity-fuelled buy-out boom is running out of steam and along with it, the ability to raise the debt that funds the lion’s share of each private equity deal.
The Times tells us that the fate of nearly $38bn of planned US company flotations is hanging in the balance this week as investors’ appetite for new share offerings wilts in the face of growing turmoil in world financial markets. Some 230 IPOs are in Wall Street’s pipeline, as companies such as Dolan Media, the US newspaper group, and Amedica, the orthopaedic implant company, seek a total of $37.9bn from the sale of new shares, the paper says.
Dolan Media has said that while it still intends to proceed with a flotation within the next month, a “number of conversations” are now taking place about its feasibility.
Among other big floats, KKR this month filed to raise $1.25bn in an IPO but has yet to set a date and is also thought to be reconsidering the float.
Many other planned IPOs are expected to be postponed or cancelled after last week’s slump in shares on both sides of the Atlantic triggered by investors’ escalating fears of a credit crunch that threatens to undercut the global boom in corporate deals.
In a symptom of how liquidity in world markets is drying up, the value of high-yield corporate bonds issued in the US to finance deals plummeted this month to $2.53bn - the lowest level since October 2002, and less than 12 per cent of the $22.5bn raised in June, The Times says. As investors took fright, the benchmark S&P 500 index last week suffered its worst trading in nearly five years, falling by 4.9 per cent.
America’s plight of falling shares, rising interest rates and tightening financial conditions is mirrored in the UK, throwing planned IPOs on the LSE into doubt. Ian Shepherdson, of High Frequency Economics, predicted that falling demand for IPOs would follow dwindling demand for bonds. Mr Shepherdson said: “The UK is the slave not the master here, in terms of markets. Bond issuance will slow in the UK as well, it will follow America. This is a very real contagion,” reported The Times.
The reason for the gloom in equity markets, as the FT notes in a weekend analysis, is that stock markets have long benefited from the so-called “private equity put”, which boosted valuations of any company that investors believed could be a target.
The market correction smacks of shock, but not everyone will be surprised. Back in May, star fund manager Anthony Bolton used his valedictory speech as he handed over the reins at Fidelity, the investment fund, to take a swipe at the role of ultra-accommodating debt markets in inflating stocks, whether good or bad.
Some analysts are inclined to think the worst, seeing parallels with the collapse of the first junk debt-fuelled, LBO boom at the end of the 1980s.
However, the FT says, “the problems of private equity could be to the benefit of public companies”, and some bankers and corporate clients dismiss fears that credit market turmoil will hold back deal activity.
Henrik Aslaksen, co-head of European M&A at Deutsche Bank, says CEOs’ confidence in deals is unlikely to change until underlying economic conditions worsen and earnings slow. “We are seeing a re-pricing of risk in the debt market but none of the fundamentals have changed. Overall, private equity has been a relatively small proportion of large European M&A deals this year,” he says.
Adrian Mee, head of European M&A at Lehman Brothers, points to a disconnect between private equity deals and trade deals.
“While the current credit environment has clearly impacted sponsor deals, we continue to see real interest from corporates for strategic M&A. The key issue will be how the credit and equity markets emerge after the summer,” Mr Mee told the FT.
These sentiments were echoed in a survey by Close Brothers, published last week, which showed more than two-thirds of chief executives of FTSE 350 companies expected to be involved in a deal in the next 12 months.
“Despite what doom-mongers might be saying this research shows UK corporates remain alive to M&A opportunities,” says Richard Grainger, chief executive of Close Brothers’ corporate finance arm. Listed companies do not need so much debt for acquisitions and are not experiencing the same ‘drag’ on their ability to do deals as private equity counterparts, he adds.
“With many auction processes being highly competitive and leading to significant premiums being paid for assets,” Mr Grainger says, “the fact that private equity groups may now find it more difficult to leverage up to the levels they recently have been might be the break that public companies need. Synergy will once again outbid leverage.”
