Biggest LBO of Year Signals Appetite May Be Growing: Real M&A

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Carlyle Group LP’s $8 billion purchase of Symantec Corp.’s data-management business shows big buyouts can still happen.

The deal announced Tuesday was the largest private-equity takeover of a U.S. company so far this year. It may not hold that title through December. While the purchase price is a far cry from the record $45 billion spent on the buyout of TXU Corp. in 2007, there are signs that private-equity firms’ dealmaking ambitions are expanding as they seek to put record amounts of money to work.

There have already been more $5 billion-plus private-equity takeovers in 2015 than in all of last year, according to data compiled by Bloomberg. Just one more $8 billion acquisition could put U.S. volumes on track for the biggest year since the financial crisis.

Private-equity firms are facing pressure to invest their piles of cash. Firms were sitting on $1.32 trillion in dry powder as of June 30, according to research firm Preqin. That’s roughly equivalent to the gross domestic product of Mexico. There could be a handful of buyouts in the $5 billion to $10 billion range before the end of the year, said David Fann, chief executive officer of TorreyCove Capital Partners.

“Transactions of over $5 billion in enterprise value are still more the exception than the rule,” said Fann, whose firm advises investors in private equity. But “there’s just a lot of money on the table. There’s a possibility of larger deals happening.”

Reloading Time

Buyout firms have already exited more than $100 billion in U.S. investments this year through sales and public offerings, according to data compiled by Bloomberg. It’s time to reload.

“This is an asset management merry-go-round and it’s moving,” said Scott Rostan, chief executive officer of Training The Street, a New York-based firm that trains junior bankers and business school students. “If they don’t get on, the horse goes away because they’re going to have to return the committed capital. But they need to make smart investments because if they don’t, it’s going to be a short ride.”

The prospect for a handful of bigger deals doesn’t mean the floodgates are open. U.S. buyout volume this year will still fall way short of the $378 billion record set in 2007. There are a number of things making it difficult for private-equity buyers: near-record equity valuations, regulatory limits on debt burdens and increasing competition from corporate buyers who are also under pressure to put cash to work.

That means the big buyouts these days won’t be as big as those in the boom years, and they will probably be structured a little differently.

New Clubs

Very few, if any, private-equity suitors can undertake an $8 billion acquisition without help. Before the financial crisis, that aid may have come from another private-equity firm as in the case of the TXU buyout, which involved a number of firms. But these club deals have largely disappeared because of government scrutiny. Instead, pension or sovereign wealth funds -- some of the biggest investors in private-equity funds -- are increasingly becoming equity partners on transactions.

“It’s the new club deal with a very different twist,” Rostan said.

Regulators have also taken note. The U.S. Securities and Exchange Commission, in its review of the industry after implementation of the 2010 Dodd-Frank law, highlighted co-investments as an area of concern. SEC officials have said private-equity managers should increase disclosure regarding which investors receive the opportunity to co-invest in deals and why.

About 10 percent, or $380 billion, of private-equity assets under management is co-invested capital, the consulting firm Bain & Co. said in a March report.

Too Big

Some targets are still just too large. CDK Global Inc., the provider of information technology to automobile dealers that’s exploring a sale to private-equity firms, could be one of those.

Blackstone Group LP, Hellman & Friedman and Permira have been examining CDK Global’s financial information, according to people familiar with the matter. CDK Global has an enterprise value of about $8.7 billion. Tacking on a 30 percent premium would increase the purchase price to more than $11 billion.

No one has attempted a buyout of that size in the U.S. since 3G Capital agreed to buy H.J. Heinz Co. for more than $23 billion in 2013 -- and it had help from Warren Buffett.

Even so, there’s reason to be optimistic that private-equity buyers will be busy with deals of all sizes. Interest rates are still favorable, debt financing is still available and that cash keeps building.

“You’re only in business as a private-equity fund to do deals, so sooner or later, you’ve got to do deals,” said Mel Cherney, a partner at law firm Kaye Scholer in New York who has represented private-equity buyers. “It takes a lot of discipline to stay within the parameters that you set for yourself in terms of projected returns, but clearly there’s pressure to put that money out there.”

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