Candover: Credit crunch strikes out mega-buyouts

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The Independent Online

The era of the big buyout is over, for now at least. That is the conclusion drawn from new research from Candover, the London buyout group, which reported a massive drop in mega-buyouts in the three months through September as the full effects of the credit crunch spread though the industry.

The £11.1bn takeover of Alliance Boots in April was the last major takeover to make it through the door in Europe before the summer credit crunch effectively closed the debt markets. According to Candover's third-quarter review, the volume of the largest transactions – those worth ¿1bn (£700m) or more – decreased from ¿29.8bn in the second quarter of the year to just ¿9bn in the third quarter.

Such large deals were what first got unions and then politicians exercised about the industry, leading to a bruising round of public questioning of its top figures this past summer by the Treasury Select Committee. Some in the industry have painted the slowdown as a positive because it has decreased public interest in the sector. "It's a blessing in disguise really. The dearth of those headline-grabbing deals has taken some of the heat off us," said a buyout executive.

The trickle of new transactions has also been accompanied by a rising number of deals that were struck at a time of easy money and rosy economic predictions that are now being undone or restructured to reflect the change in the markets. So far this year, 46 private equity buyouts in America and Europe worth $132bn (£64bn) have been pulled, more than twice the $58bn worth of deals yanked during all of last year, according to Dealogic.

The most high-profile case is that of Sallie Mae. JC Flowers agreed to buy the American group that specialises in lending to students in April for $25bn, making it one of the largest buyouts ever. Yet as market conditions deteriorated and a new law cutting subsidies to the sector was introduced, Flowers pulled out of the deal, citing a material adverse change in the company's business. Sallie Mae sued for breach of contract and the companies are embroiled in what appears will be a long and bitter court battle.

Banks have also begun to renege on finance terms in fear of getting stuck with bonds that they are unable to sell to other investors wary of pouring money into deals. Indeed, Blackstone is stuck in a squabble with Lehman Brothers and JP Morgan, the banks who first agreed in March to fund its $1.8bn takeover of PHH, a mortgage and fleet services company. The Wall Street giants have since cut the amount of debt they are willing to provide for the deal by $750m.

The high-water mark that saw the size of funds explode in recent years is also likely to have now passed. Blackstone closed the world's largest ever fund earlier this year at $21.7bn. Yet with three-quarters of that cash pile already invested, the New York giant is set to launch a new fundraising drive next month. Market sources expect that the new fund will be significantly smaller because it would be hard-pressed to deploy that amount of money in the current environment.

Candover said that the UK remains the biggest buyout market in Europe, though its share of total deals dropped from 62 per cent to just 40 per cent due to "the absence of the very largest transactions, which had weighted the figures so heavily in its favour in the last quarter". The health of the mid-market, or deals classified roughly as those worth ¿750m or less, was the only part of the industry that registered growth in both number and value of deals.

"These latest figures show, as expected, a near 30 per cent decline in the headline value of buyouts as the credit crunch began to hit the big deals," said Candover's Marek Gumienny. "There are still deals to be done, but the dynamics of deal making have changed. Focusing on the fundamentals – can businesses repay their debt in three/five/seven years – is back in fashion."

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