Reversal of fortunes for the giants of private equity

A year ago, the New York private equity giant Blackstone was at the height of its powers. Riding the crest of the buyout boom, the firm launched what was at the time the largest ever buyout with a $38.3bn offer for the property company Equity Office. Its American rivals KKR and TPG laun-ched an even bigger deal, the $45bn purchase of the utility TXU, a few weeks later.

Such was the fever that Stephen Schwarzman, Blackstone's chief exec-utive, told how at last January's World Economic Forum in Davos a chief executive of a $125bn company pleaded for him to take him private: "Please, if you can do me, do me." Or so the story went.

Twelve months on, the difference could not be more stark. Rather than kicking off the year with yet another record-breaking deal, Blackstone instead finds itself facing a $50m legal claim from PHH, the mortgage and vehicle fleet company that it and partner General Electric had agreed to take over last March for $1.8bn an amount that, in the midst of the takeover boom, was considered relatively paltry. Yet due to the meltdown in the global credit markets, Blackstone has been unable to raise the fin-ancing, at least on terms that would make economic sense, to do the deal. PHH aborted the transaction this week, and is claiming the termination fee to which it says it is entitled under the original merger agreement.

According to Dealogic, $226bn worth of deals were withdrawn in the past year more than twice those called off the year before. Most of the biggest undone deals came in a rush toward the end of the year as the credit crunch dragged on.

Indeed, the pace of deals has fallen off drastically since the top of the market was reached in the second quarter of last year, when according to Mergermarket $425bn worth of deals were struck. By the last quarter of last year, that amount had fallen to less than half that, $175bn, with most of the major deals being done not by buyout firms but large companies which are less reliant on debt markets to fund their transactions.

Private equity buyers have been hit particularly hard by the downturn because they pay for the companies they buy primarily with debt they raise on the markets, with a small portion of their own cash to make up the difference. Many deals struck earlier in the year were done on the assumption that they could pay for them using sky-high multiples of leverage that had become the norm before last summer.

With little sign of a return to those favourable financing terms, many firms took the decision that it was better to pay a break-up fee than risk saddling themselves with companies loaded with onerous debt payments and operating in the context of a slowing economy.

Cerberus did just that on not one but two big deals last year. The buyout firm decided to pull out of its $8.6bn takeover of Affiliated Computer Services in September. Just before Christmas it informed United Rentals that it was cancelling the $6.3bn buyout, and is now on the hook for a $100m break-up fee.

The biggest aborted transaction deal came last month when a JC Flowers-led consortium said that it would not proceed with the $25.5bn buyout of Sallie Mae, the American student lender.