For Britain, there were two takeovers that came to mark the pinnacle of the private equity boom. One was the £10bn acquisition by Kohlberg Kravis Roberts of Alliance Boots. The other was Guy Hands' £4bn takeover of EMI. Even at the time, both looked like top-of-the-market deals, and so they proved. Yet I'm not in the camp that believes these transactions are also about to become the first major victims of the leveraged buyout market.
Famous last words, but at this stage it looks as if the Alliance Boots deal will survive the cleansing fires of the credit crunch unscathed. Alliance Boots was one of the last "covenant lite" transactions before the credit markets shut up shop. So even if debt holders wanted to force a haircut, they might struggle. The KKR private equiteers squeezed such good terms out of their bankers that they have made themselves largely immune.
The underlying business is in any case hugely cash generative, and therefore ought to be able to service its debts appropriately. Bankers that have been left with the debt as a result of being unable to syndicate or securitise it as planned because of the credit crunch, have on the whole chosen to treat it as perfectly credit worthy and therefore absorbed it on to their books without writedown.
A rather different set of circumstances surround the EMI transaction, where there is already a refinancing under way whose successful conclusion should be announced today, alongside a radical restructuring of the underlying business that in time should set the recorded music operation on a stable footing. Yet you wouldn't believe this reasonably benign outlook from the sort of PR Mr Hands has been getting. To the outside world, it looks as if EMI is going to hell in a handcart.
Robbie Williams' manager has already accused Mr Hands of running the business "like a plantation owner". Paul McCartney has complained bitterly about his former label and a number have muttered darkly about quitting.
Other artists accuse Mr Hands of having no understanding of the music industry, and of skills that are completely inappropriate for dealing with rock megastars such as themselves.
In fact, Mr Hands seems to be doing most of the right things in the way he's responding to an industry in the midst of deep structural change and consequent crisis. For years the music industry has been living high on the hog in a manner that has become progressively unsupported by the amount of revenue it generates. It's high time that more professional management was applied. For the real talent on EMI's roster, this can only be for the good. You cannot undertake radical change without breaking a few eggs.
The good news is that Mr Hands has at least been able to raise the money to do it. Approximately £250m of new equity has been committed on terms equivalent to those of the original £1.5bn equity element of the £4bn buyout. Obviously there is some dilution involved for existing equity holders, but this is a far cry from the complete wipeout of equity holders that is the norm when bankers are breathing down a company's neck.
Mr Hands announced his bid for EMI at the height of the private equity boom, when bankers were falling over themselves to lend. By the time it closed, the credit crunch was already biting hard, and even the "still dancing" Citigroup was not prepared to lend as much to complete the transaction as it had originally promised. The equity element was therefore raised from £1.3bn to £1.5bn, with the balance of the £4bn price provided by Citi as debt.
With fast-deteriorating credit markets, Citi was unable to syndicate or securitise this debt in the normal way and has been left with virtually the whole of the exposure. Bankers are very keen to lend in the good times, yet equally determined to obtain their pound of flesh in the bad. The fact that Citigroup has felt unable, or uninclined, to force a more draconian refinancing suggests strongly that the situation at EMI is not as bad as it is being painted.
The great bulk of EMI's value lies not in its high-profile recorded music side, but in music publishing, or managing the music catalogue so as to produce the greatest quantity of money for artists. This annuity-style business was always a natural for private equity ownership and of itself comes close to justifying the price that Mr Hands paid for the whole of EMI.
Recorded music, or producing new material, is the bit of the company that gets all the publicity, but for years now has never been any more than about 10 per cent of the value. Mr Hands hopes to get this bit right, too. Nobody can say whether he will succeed, but as far as I can see, he's setting about it in exactly the right way. The Terra Firma takeover of EMI is widely portrayed as a private equity deal that is cratering. It may still be too early to assert that to the contrary, it's turning out to be a triumph, but by the same token, I wouldn't write Mr Hands off quite yet.
Rocky horror show for the Government
The Chancellor, advised by the Governor of the Bank of England, was swift to dismiss the terms of a proposed rescue takeover by Lloyds TSB for Northern Rock last summer. Yet if he had known then how events were to pan out, he'd have bitten Eric Daniels' hand off to accept.
The Lloyds TSB chief executive was willing to rescue the Rock, but only if the Government was prepared to underwrite £30bn of its borrowings on non-penalty terms. This seemed an outrageous demand in almost every respect at the time, and in any case it seemed quite unacceptable for ministers to use public money to help finance a private-sector takeover.
Yet in hindsight it would have yielded a solution far preferable to the place the Government now finds itself in, with nationalisation seeming an ever more inevitable conclusion, and with it the prospect of having to bring some £60bn of liabilities on to the Government's books.
There are plenty of precedents for nationalising banks, both here and abroad, but none quite like this one. Normally banks are brought low by bad debts. Nationalisation generally involves separating the bad debts from the good ones, bundling them off into a separate business that is managed out in the public sector, and then flogging off the essentially healthy bank that remains. This is what happened with Credit Lyonnais in France. The banking crisis of the early 1990s was dealt with a similar way in Sweden and Norway. The same model has also been followed in Japan.
With Northern Rock, though, there seems to be little wrong with the underlying state of the lending book, or not that we know of. Rather, the problem is on the borrowing side of the balance sheet. No one, other than the Government, will lend against the assets. What at first looked like a temporary liquidity problem has now become a more permanent state of affairs. The City's finest brains have been unable, so far, to persuade the markets to lend. And the other banks have decided to use the credit crunch to squeeze one of their biggest mortgage competitors out of the market.
With the Government having lent Northern Rock so much, and guaranteed most of the other creditors, the Rock might already be said to have been nationalised in all but name. Yet to actually take the mortgage bank into public ownership is a damning indictment of the way this whole affair has been managed. It also seems to me quite unlikely to produce a satisfactory long-term outcome for the taxpayer or the banking system. Mortgages are not what governments do.
It is only because the Rock debacle has been on such a long fuse, and that so many opposition MPs have been urging nationalisation as the obvious solution, that it could be thought acceptable at all. The public has been bored into thinking it just another unpreventable milestone in the banking crisis. This is no doubt how the Government will try to present it, too. We all know the reality. Good government is about preventing the mess in the first place, or at least clearing it up before it becomes unmanageable. On both counts, the Government has failed.