The M&A Deals Most at Risk

The credit crunch throws the closing of some buyouts into doubt, as private equity firms face pressure from banks and debt buyers to revise the terms

by Steve Rosenbush

Steve Siesser, a mergers-and-acquisitions attorney who works on many midsize buyouts, has seen the new private equity environment firsthand. Siesser, a partner with law firm Lowenstein Sandler PC in New York, got a call last week from a bank that had agreed to fund one of his client's buyouts. Siesser won't identify the deal, but says the transaction was worth several hundred million dollars and included $160 million in bank debt. The deal had been negotiated last month, before the credit crunch hit the markets in late July. Now the banker was on the phone with Siesser, dictating new terms for the deal.

The bank told Siesser it wanted to raise the interest on the debt by as much as two percentage points, to 13%. It also wanted wide latitude to add covenants, or financial guidelines that the company would have to follow to avoid being declared in default. Both demands make the proposition far more expensive for Siesser's clients, and there's a chance the deal won't close.

Siesser's story is just one example of how far and how fast the credit crunch has spread through the private equity world, raising doubts about whether previously announced deals will be able to close and what the new terms will look like. It began in late July, as the market stopped funding risky loans that allowed borrowers to repay their debt by taking on more debt. It quickly spread to more conventional forms of debt (see BusinessWeek.com, 7/30/07, "The Deep Risks of 'Asset-Light' Debt"). Now some investors are betting on longer odds for the closing of some major buyouts. "I am hearing that deals at the larger end of the spectrum are having even more trouble with financing," Siesser says. "It's possible that some mega-cap deals won't close."

Market Discomfort

Which deals face the greatest hurdles? Trading patterns suggest that investors are nervous about whether the management-led $8.2 billion buyout of Affiliated Computer Services (ACS) will close under the original terms. The deal was considered pricey, and it is laden with debt. Chairman and founder Darwin Deason and Cerberus Capital Management offered $59.25 a share in March, as the leveraged buyout (LBO) boom was in full roar. The stock is trading below $50, 16% below the deal price.

The Thomas H. Lee Partners-led $5.3 billion buyout of Ceridian (CEN) also has produced a wide merger arbitrage spread, reflecting general unease in the markets. The buyout firm offered $36 a share for Ceridian, an information services company. Its shares have dropped 9% to $32.60. And Cerberus' $6.6 billion buyout of United Rentals (URI) faces skepticism in the market, for similar reasons. Less than a month ago, Cerberus offered $34.50 a share for the Greenwich (Conn.)-based equipment rental company. The shares have since dropped 13% to $30.50.

A critical test for the market will be Kohlberg Kravis Roberts' $28 billion buyout of information company First Data (FDC). The huge size of the deal makes it difficult to absorb. The original structure of the loans also fell into the "covenant light" class that fell out of favor because they allowed cash-tight borrowers to repay debt by borrowing more money.