A harder look at private-equity deals

Amy Scott Jun 27, 2007
HTML EMBED:
COPY

A harder look at private-equity deals

Amy Scott Jun 27, 2007
HTML EMBED:
COPY

TEXT OF STORY

Scott Jagow: Private equity, private equity, private equity. It’s been the story on Wall Street, and often this program. A lot of those deals have been paid for with borrowed money. But the people loaning that money are starting to say, wait a minute, there’s too much debt here.

Yesterday, underwriters of a $1.5 billion bond pulled the plug on a deal. It was the buyout of a big company called U.S. Foodservice. Amy Scott has more from New York.


Amy Scott: The takeover of U.S. Foodservice is a classic leveraged buyout. The buyers are paying for the company by loading it up with debt.

But yesterday, potential investors in some of that debt didn’t go for it. Bankers cancelled the company’s bond offering. And the Wall Street Journal says the company shelved plans to sell $2 billion dollars in loans.

Chris Donnelly follows the buyout market for Standard and Poor’s Leveraged Commentary and Data. He says investors didn’t like the way the deal was put together — too much debt, not enough return and too few provisions to warn investors if things start to go wrong.

Chris Donnelly: Those deals have become so aggressively structured that investors felt that the market was becoming too over-heated.

The deal won’t fall apart. Donnelly says investment banks will loan U.S. Foodservice the money directly. It’s part of the deal they made to win the underwriting business.

U.S. Foodservice isn’t the only company responding to nervous investors. In the past week, others have scaled back debt offerings and added investors protections.

Erik Hirsch is chief investment officer at Hamilton Lane. The company invests in buyout funds. He’s not ready to call this a trend.

Erik Hirsch: You know, sometimes this is where the crack begins. My view right now is that this is much more of a case-by-case commentary on specific transactions, though.

Some analysts think the push back could slow down the buyout boom and the wider economy. According to Thomson Financial, just seven deals were announced on Monday this week — compared to 43 a week earlier and 84 two weeks before that.

In New York, I’m Amy Scott for Marketplace.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.