Carlyle Group LP (CG:US), which today agreed to purchase DuPont Co. (DD:US)’s auto-paint unit for $4.9 billion, has become the most active U.S. private-equity buyer this year in part by employing a 25-year-old strategy that helped fuel its growth: taking over unwanted businesses from large companies.
Carlyle has agreed to buy at least $16 billion of assets in 2012, more than double Blackstone (BX:US) Group LP and Apollo Global Management LLC (APO:US), according to data compiled by Bloomberg. Two of its largest deals this year were purchases from big companies, including the July buyout of United Technologies Corp. (UTX:US)’s Hamilton Sundstrand industrial unit for $3.46 billion.
Carlyle, created in 1987 by William Conway, Daniel D’Aniello and David Rubenstein, has snapped up corporate orphans since it started buying up defense companies in the aftermath of the fall of the Berlin Wall. DuPont, based in Wilmington, Delaware, decided to exit the auto-paints market it has been in since the introduction of the motor car, as part of a shift to other industries such as food and biofuels.
“This is a classic deal, back to basics,” said Paul Schaye, managing partner of Chestnut Hill Partners, a New York-based company that helps private-equity firms evaluate transactions. “This was a non-core business for DuPont, which is taking its own business somewhere else.”
Apollo Global Management LLC and a team of KKR and Onex Corp. also competed for the business. Apollo offered more than $4 billion while KKR-Onex bid less than $4 billion, according to two people with knowledge of the situation, who asked not to identified because the bidding was private. Blackstone and Bain Capital LLC, which teamed up in an earlier round of the contest, expressed interest at less than $4 billion, said one of the people.
Officials at Apollo and KKR declined to comment, while Blackstone spokesman Peter Rose couldn’t immediately be reached for comment.
Carlyle is paying at least 10 times earnings before interest, taxes, depreciation and amortization, DuPont Chief Financial Officer Nicholas Fanandakis said on a conference call today. Acquisitions in the coatings industry averaged 9.7 times Ebitda in the past decade, according to data compiled by Bloomberg on 13 deals exceeding $100 million.
Carlyle, which initially used government connections in its hometown of Washington for deals, later expanded beyond defense contractors. So-called carve-outs were once the bread- and-butter of the leveraged buyout business as practitioners such as Carlyle, Blackstone, and Clayton Dubilier & Rice persuaded boards of directors to sell a struggling unit or a business the corporation had decided didn’t fit into a new strategic direction.
“We love carve-outs,” said Greg Ledford, who led the Carlyle team that worked on the DuPont deal. “There’s always brain damage pulling businesses out of large corporations. But if done right, there’s also a lot of value to be had.”
During the past decade, carve-outs were overshadowed by high-profile take-private deals, where the private-equity firm bought a public company it deemed was undervalued by the stock market. Brand names like Toys “R” Us Inc., Hilton Worldwide and Dollar General Corp. (DG:US) agreed to such deals during the LBO boom of 2005 and 2007.
The DuPont and United Technologies deals are two of the 10 biggest purchases by private-equity firms this year, Bloomberg data show. Carlyle also agreed this month to buy Getty Images Inc. from buyout firm Hellman & Friedman LLC for $3.3 billion.
Blackstone has announced $6.8 billion in purchases this year, the data show. Apollo has agreed to $7.9 billion in deals. KKR, the firm run by Henry Kravis and George Roberts, has been involved in less than $1 billion of acquisitions.
Carlyle’s stock has gained 18 percent since its initial public offering on May 2. Blackstone has risen 3.7 percent, Apollo has increased 5.9 percent and KKR is up 4.9 percent.
Active interest by private-equity buyers may reflect a relatively low cost of debt, as well as a desire to show investors that they are pursuing new deals after raising new money, said Sachin Shah, a Jersey City, New Jersey-based special situations strategist at Tullett Prebon Plc.
“As they’re out fundraising, they need to get their name out there,” Shah said in a telephone interview today.
Private-equity firms pool commitments from investors such as pension funds, university endowments and wealthy families into distinct funds. After identifying a target company, they pair that money with debt to fund the takeover and seek to sell the target or take it public within several years to earn a profit for themselves and their investors.
Carlyle is seeking about $10 billion for its sixth and latest U.S. buyout fund. Carlyle plans to raise money for 11 funds this year, co-chief executive officer Rubenstein said in May, to take advantage of what he saw as a revival in the deal-making market.
Carlyle has $156 billion in assets in 99 funds, as well as 63 fund-of-funds, according to its website. Equity for the DuPont deal will came from Carlyle Partners V and Carlyle Europe Partners III.
Carlyle’s previous transportation industry investments include Allison Transmission Holdings Inc. (ALSN:US), the producer of transmission for trucks, buses and the military, and auto-parts maker United Components Inc., according to its website.
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