Buyouts fueled by EBLs

Buyout Firms Engage Banks in Financing LBOs With Novel Bridge
By Jason Kelly and Edward Evans

May 23 (Bloomberg) -- Kohlberg Kravis Roberts & Co. wanted Alliance Boots Plc, owner of the U.K.'s largest drugstore chain, for itself. Instead of teaming up with another private equity firm, a practice known as clubbing, KKR kept all of the bragging rights to the 11.1 billion pound ($22 billion) deal, Europe's biggest buyout ever.

``It enabled us to have a very straight and clear discussion with the Alliance Boots board,'' says Dominic Murphy, 40, the London-based KKR partner who led the acquisition. ``We could make decisions very quickly and effectively. We didn't need to revert to other partners.''

Private equity's record war chests are giving firms the power to make billion-dollar deals by themselves, avoiding the cumbersome clubs that spurred U.S. prosecutors last year to begin an antitrust probe, according to a person familiar with the matter. As buyout shops drive the value of acquisitions past last year's record $701.5 billion, they're pushing fee-hungry banks into providing new kinds of financing for their solo purchases.

Buyout partnerships rose to prominence in the past three years, highlighted by the deal in which Blackstone Group LP and six other firms paid $10.4 billion for Wayne, Pennsylvania-based software developer SunGard Data Systems Inc. in March 2005.

Less than two years later, in February, New York-based Blackstone took the opposite approach, single-handedly paying $39 billion for Equity Office Properties Trust, the second- biggest buyout on record. That was followed by Cerberus Capital Management LP's $7.4 billion agreement in May to take over Chrysler from DaimlerChrysler AG.

Boost From Equity Bridges
``You'll see more of it,'' says David Rubenstein, co- founder of Washington-based Carlyle Group. ``Private equity firms realize they can get the money they need for these deals.''
As the buyout firms fly solo, they're getting a boost from banks, which are providing so-called equity bridges to help them purchase companies. In a bridge, banks buy equity in the target company, reducing the amount of money required from the private equity firm.

After the deal is completed, banks sell their stake, often to limited partners -- pension funds, university endowments and wealthy individuals -- in the private equity firm's funds. New York-based KKR received a 1.39 billion pound equity bridge from Barclays Plc and six other banks in April to buy Alliance Boots, marking the first use of this type of financing in Europe.
Banks are providing bridges to get a bigger share of the advisory fees from today's buyout boom. ``We have to do it,'' says Piero Novelli, co-head of global takeovers at UBS AG in London. ``It's certainly not something most banks would be delighted to be doing. In very large, lucrative buyouts, clients demand it.''

Pension Funds Take Stakes
Pension funds and endowments are also helping buyout firms go it alone, Rubenstein, 57, says. Institutional investors are beginning to take stakes directly in the acquired companies because the payoff is likely to be bigger than returns from buyout funds, which charge fees of up to 20 percent of the profit from each deal.

``It has better economic terms, and the investors like those terms,'' Rubenstein says. ``They like to pick individual deals.'' The Canada Pension Plan Investment Board, the country's second-biggest public pension fund manager, in April joined KKR in an undisclosed bid for BCE Inc., Canada's largest telephone company.

Buyout firms raised an all-time high of $210 billion in 2006, a 57 percent jump from the prior year, according to London-based research firm Private Equity Intelligence Ltd. In April, Goldman Sachs Group Inc. collected $20 billion for the world's biggest fund. The rising pool of capital is fueling another unprecedented year for leveraged buyouts: Firms announced $409.8 billion in deals this year.

Justice Department Probe
Private equity firms prefer sole ownership because it gives them more control in boosting the performance of companies, says Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business in Hanover, New Hampshire.

Blaydon says club deals such as SunGard make it difficult for owners to hammer out strategic decisions about acquisitions and selling shares to the public. SunGard's seven owners say they're now trying to expand the company through acquisitions in China and Europe.
``No one talks about these situations enthusiastically,'' Blaydon says. ``Everyone seems more than happy to go back to sole control.''

Buyout firms may also dodge further scrutiny from the U.S. Department of Justice by avoiding the partnerships. In October 2006, the government launched an informal inquiry into club deals to determine whether firms were colluding to thwart competition and artificially hold down the prices paid for companies, say lawyers at Bingham McCutchen LLP.

Megadeal Buzz
Michael Flynn, a partner who works on private equity transactions at Sonnenschein Nath & Rosenthal LLP, says single- buyer deals eliminate any appearance of impropriety.

``Nobody wants the DOJ sniffing around,'' says Flynn, who's based in New York.

A DOJ spokesperson didn't return a phone call.

The biggest buyout ever -- the $45 billion deal in February for Dallas-based power producer TXU Corp. -- took the combination of KKR and TPG Inc., formerly known as Texas Pacific Group. Such partnerships will occur less often as a growing number of private equity firms battle to distinguish themselves, says Stefan Selig, global head of mergers and acquisitions at Banc of America Securities LLC.

The best way for a firm to attract investment from a limited partner or be chosen by a company for an LBO, Selig says, is to be named in a blaring headline as the sole master of a megadeal.