Buyout Hangover Fades as Biggest U.S. LBOs Get Boost From IPOs, Financing

Kinder Morgan Inc. is showing that big isn’t always bad in the world of leveraged buyouts.

The $27.5 billion takeover of the Houston-based energy- pipeline company was the second-largest U.S. LBO on record when it was announced in May 2006. Such mega-deals looked like losers after credit markets froze in mid-2007, leaving the companies saddled with debt as a global recession set in.

Now, Kinder Morgan is scheduled to go public this week, handing its owners, including co-founder Richard Kinder, Goldman Sachs Group Inc. and Carlyle Group, a potential threefold return on their initial investment. The stock sale may pave the way for initial public offerings by private equity-owned companies such as Hilton Worldwide Inc. and Freescale Semiconductor Inc., which were once deemed too troubled to sell, and help firms such as KKR & Co. build investor interest in new funds.

“The industry is doing a lot better than most people thought a year ago because of the quality of the companies, significant improvement in their operations and the flexibility of their capital structures,” Mark Nunnelly, a managing director at Boston-based Bain Capital LLC, said in an interview.

While buyout firms are marking up the value of some of their portfolio companies as the stock market rallies, they aren’t ready to engage in the freewheeling spending that marked the peak of the LBO market.

Carlyle dropped out of the bidding for Beckman Coulter Inc., even though the company eventually fetched the lowest valuation ever in a medical-instruments industry takeover of at least $1 billion, according to people familiar with the sale who asked not to be named because the information wasn’t public. A Blackstone Group LP offer was too low, said the people.

Mega-Deal Scorecard

Of the 10 biggest U.S. LBOs since 2005, Blackstone sold large pieces of office-building owner Equity Office Properties Trust before the buyout market collapsed, and phone company Alltel Corp. was sold by Goldman Sachs and TPG Capital to Verizon Wireless.

Hospital chain HCA Holdings Inc. paid owners including KKR and Bain a dividend at the end of last year, while its plan for an IPO, announced in May, slipped into 2011. Caesars Entertainment Corp., a casino operator, delayed going public in November, citing market conditions.

Blackstone’s Hilton and Archstone, an apartment landlord owned in part by Lehman Brothers Holdings Inc., are potential candidates for share sales, perhaps as soon as this year.

The remaining four companies in the top 10, including Energy Future Holdings Corp., First Data Corp. and Clear Channel Communications Inc., are in enough financial stress that an exit by their owners is unlikely any time soon.

KKR Fundraising

KKR, the New York-based firm run by Henry Kravis and George Roberts, kicked off fundraising for its 11th North America- focused buyout fund in January, winning a $525 million commitment from Oregon’s public employees’ pension plan. That’s less than half of what the state committed to KKR’s last fund. Other firms are weighing new funds, including New York-based Cerberus Capital Management LP.

“It’s important for LPs to see these exits because they’re still very gun-shy about providing additional capital,” said David De Weese, a general partner with Paul Capital in New York, which oversees about $7.6 billion of investments.

Officials at KKR and Cerberus declined to comment.

The success of the fundraising pitches hinges in part on buyout managers’ ability to prove they can reap profits from the $20 billion-plus deals that characterized the LBO boom of 2005 to 2007. They may get a boost by a pair of recent successes.

Nielsen, BankUnited

Nielsen Holdings NV, the New York-based television-ratings company backed by firms including Blackstone, KKR, Carlyle and Thomas H. Lee Partners LP, has gained 13 percent since its Jan. 25 debut. BankUnited Inc., owned by Blackstone, Carlyle, WL Ross & Co. and Centerbridge Capital Partners LLC, is up 10 percent since the Miami Lakes, Florida-based lender went public Jan. 27.

In addition to an improving IPO market, private-equity firms are benefiting from a mergers and acquisition market that rose 27 percent by volume last year, according to data compiled by Bloomberg, and from a freer flow of financing for new deals and debt restructurings. Buyout managers have announced investments valued at $22.3 billion this year, almost three times the amount during the same period in 2010.

Kinder Morgan is nearing completion of a share sale that values the company at about $19.4 billion, based on the midpoint of the offering’s price range. Carlyle’s stake is worth about $2.2 billion based on that figure, giving the Washington-based firm a profit of almost three times based on its initial investment of $882 million.

Pipeline Payoff

The company has expanded its network of pipelines, including through acquisitions. Kinder Morgan’s $1.18 billion acquisition spree last year culminated with an $875 million agreement to buy a 50 percent stake in Petrohawk Energy Corp.’s gas-gathering network in the Haynesville Shale, which straddles the Louisiana Texas border.

Larry Pierce, a spokesman for Kinder Morgan, declined to comment.

Also pursuing an IPO is HCA, the largest U.S. non- government hospital chain, which was bought for $32.2 billion including debt in 2006, surpassing KKR’s much-chronicled 1989 purchase of RJR Nabisco Inc. as the biggest LBO at the time, according to Bloomberg data. The company may begin marketing the offering to investors as early as the end of this month.

Double Cost

Since filing to go public, the Nashville, Tennessee-based company has paid its owners three dividends totaling about $4.3 billion. That compares with the roughly $5 billion the private- equity firms put in to the deal, according to research firm CreditSights Inc., which said demand for the shares is likely to be strong.

“Given the rally in the stock market since the company filed its S-1 in May of last year, the issuing environment for the company’s shares has likely improved significantly,” Sam Goodyear, an analyst for the firm in New York, wrote in Feb. 4 note.

KKR valued HCA at more than twice what it paid for the company as of September of last year, according to public filings. Bain, which isn’t publicly traded, doesn’t disclose where it marks its investments. Profit in the fourth quarter rose 8 percent to $1.45 billion as revenue increased about 2 percent to $7.73 billion. HCA has $29 billion in debt, according to Bloomberg data.

Ed Fishbough, a spokesman for the company, declined to comment.

Profits From Sales

Investors in private-equity funds like to see managers generate profits by selling the companies they own, not just through dividends.

“Meaningful liquidity is selling the equity in a company,” said Andrew Reilly, board member of the Rhode Island State Investment Commission, which oversees $6 billion for teachers and state and municipal employees. “It’s not milking the cow that counts. It’s selling it that matters.”

Some of the companies weighing stock offerings were once left for dead. Freescale, the chipmaker taken private by a group of buyout firms in 2006, has picked Deutsche Bank AG and Citigroup Inc. to manage its IPO, people familiar with the matter said Feb. 1.

Freescale, whose chips are used in Amazon.com Inc.’s Kindle and Sony Corp.’s Reader electronic devices, would aim to raise more than $1 billion to pay down $1.2 billion in debt coming due in 2014, Chief Executive Rich Beyer said in an interview in December. The Austin, Texas-based company has about $7.9 billion in total debt, Bloomberg data show.

Hilton Comeback

The potential offering marks a dramatic turnaround for the chipmaker. Beyer has cut jobs and closed plants in an effort to regain profitability. The company’s net loss narrowed to $156 million in the third quarter while sales increased 29 percent to $1.15 billion.

Among other LBO-backed chipmakers that went during the past two years, Singapore-based Avago Technologies Ltd. has more than doubled its stock price and NXP Semiconductor BV of Eindhoven, the Netherlands, has almost doubled in value.

Hilton, bought by New York-based Blackstone for $26.2 billion including debt as the credit markets crumbled in 2007, has seen its own rebound tied to a healthier economy and a financial restructuring. Hilton cut its total debt by about $4 billion through a restructuring last year.

Blackstone is now carrying its investment above cost for the first time since the purchase and has listened to pitches by bankers who want to take the McLean, Virginia-based hotelier public, according to people with knowledge of the matter.

A spokesman for Hilton, Aaron Radelet, declined to comment.

Caesars’ Woes

Improving conditions for buyout firms haven’t bailed out Caesars, which pulled its IPO. The gaming company was taken private by New York-based Apollo Global Management LLC and TPG of Fort Worth, Texas, for $27.2 billion including debt in January 2008, as the recession deepened and leisure travel declined.

Still, the company, formerly named Harrah’s Entertainment Inc., stands to benefit from a recent pick-up in convention business and tourism in Las Vegas, where it’s based. Its owners have cut debt by more than $4 billion to $23.6 billion in the past two years by offering creditors new bonds at a discount for their old notes, buying back other debt for less than face value and extending maturities on $5.5 billion in loans.

The company hasn’t said when it might revive the IPO. Jacqueline Peterson, a Caesars spokeswoman, declined to comment.

Long Way Off

Several of the other biggest deals are far from any resolution, including Energy Future Holdings, the record-setting $43.2 billion leveraged buyout led by KKR and TPG in 2007. The firms each value their stakes in the biggest power producer in Texas, formerly known as TXU Corp., at around 20 cents on the dollar. The private-equity owners agreed to hold the company for at least five years to assuage fears about them flipping the company.

Energy Future Holdings has extended maturities of its debt, which totals more than $40 billion, according to Bloomberg data. The company’s revenue and profit have been hampered by gas prices that are about 50 percent lower than when the deal was announced in 2007.

Lisa Singleton, spokeswoman for Energy Future Holdings, declined to comment.

First Data, acquired by KKR in 2007, is valued by KKR at 40 percent below cost as of September, according to private-equity firm’s public filings. The Atlanta-based company’s net loss in the fourth quarter narrowed to $179.2 million from $368.6 million a year earlier. Revenue rose 6 percent to $2.73 billion.

Debt Deals

First Data, which has about $18 billion in bonds and loans coming due through 2016, has used friendly debt markets to push out deadlines for its borrowings. The company in December moved maturities for about $6 billion in debt previously maturing in 2015 to 2021 and 2022, according to an investor presentation posted on First Data’s website.

“While an IPO is a potential strategy for a company with our capital structure, we have nothing to announce at this time,” Chip Swearngan, a spokesman for the company, said in an e-mail.

Clear Channel, taken private in 2008 for $25.4 billion including debt, has cut jobs and restructured its balance sheet to weather an advertising slump. In November 2010, Robert W. Pittman, former chief operating officer at the former AOL Time Warner, and chief executive officer of Viacom’s MTV Network, made a personal investment in Clear Channel and was named the chairman of the company’s media and entertainment holdings.

No Nielsen

“Because of the company’s performance and the overall industry, there is almost no chance of an IPO any time soon,” said Jake Newman, a Creditsights analyst. “There is just too much debt; it’s not a Nielsen.”

The company plans to amend its credit agreement to delay maturities on borrowings and get permission to sell $750 million of bonds due 2021 to repay $500 million of loans, San Antonio- based Clear Channel said Feb. 7. A Clear Channel spokeswoman, Lisa Dollinger, declined to comment.

The inability in some cases to fundamentally improve businesses so they’re viable as public companies has some investors questioning the private-equity model.

“The whole idea of investing in private equity is that the buyout owners work their magic, untangle costs and redeploy more efficient companies to the public markets at a multiple,” said Harold Bradley, chief investment officer of the $1.7 billion Ewing Marion Kauffman Foundation in Kansas City, Missouri. “But most of these exits are about getting the problems off the firms’ books, back into public hands after collecting huge fees.”

Office Flip

An IPO may also not provide immediate profit for private- equity firms and their investors, since proceeds are often used to pay down debt. Buyout firms use secondary offerings to cash out some of their stock.

Sales to larger companies are a faster path to profits. Alltel, based in Little Rock, Arkansas, is the only one of the 10 biggest U.S. deals that the owners have sold outright. TPG and New York-based Goldman Sachs, who bought the company in 2007 for $24.7 billion, sold it the following year to Basking Ridge, New Jersey-based Verizon Wireless for $28.1 billion.

Blackstone bought Chicago-based Equity Office in 2007 and immediately upon closing the deal sold a portion of the properties. Blackstone kept buildings in markets such as New York, Boston and Los Angeles and may seek to sell them amid the real estate recovery, according to a person familiar with the strategy, who asked not to be identified because the company is closely held.

Optimism Grows

As the private-equity market heats up, firms say the size of deals may increase, though not to the levels seen during the boom.

Blackstone President Tony James told reporters last week that a $10 billion leveraged buyout was possible.

“I wouldn’t rule out a $20 billion deal if the appetite of the credit markets continues to expand, but most managers are treading carefully,” said Daniel Lennon, a partner at Latham & Watkins LLP in Washington. “The industry has got the wind at its back for now.”

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Cristina Alesci in New York at calesci@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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