Bonanza of buyouts may be on comeback

NEW YORK - Wall Street seemed almost ready to say goodbye to the big buyout boom of 2007.

Just a week ago, some analysts were questioning whether private equity firms could survive a trifecta of problems. Bond market turbulence seemed to be curbing enthusiasm for debt sales used to fund deals, while lawmakers in Washington, D.C., were looking to raise taxes for the industry. And Blackstone Group's public debut didn't resonate with investors.

Such speculation now seems quite unfounded. This past week, Blackstone's Stephen Schwarzman secured a $26 billion acquisition of Hilton Hotels Corp., and KKR & Co. LLP's Henry Kravis unveiled a $1.25 billion plan to go public. Apollo Management's Leon Black was said to be in talks with Abu Dhabi about a minority stake ahead of a potential initial public offering.

It was clear that the big buyout shops expect to remain viable no matter what the market conditions or political sentiment might be.

"Nobody wants to be at a competitive disadvantage," said Colin Blaydon, director for the Center of Private Equity and Entrepreneurship at Dartmouth's Tuck School of Business. "These guys are bringing about the birth of the bulge-bracket private-equity firm - much the way the investment banks emerged in the 1980s."

Buyout surge

Relatively low interest rates and the availability of easy credit from lenders fueled the surge in leveraged buyouts the past two years. Massive amounts of untapped liquidity has helped buyout shops orchestrate bigger and broader deals. During the first half of this year, private equity accounted for 34 percent of the overall $1 trillion in U.S. acquisition activity, according to deal tracker Dealogic.

That didn't slow this past week when Blackstone on Tuesday made its offer to buy Hilton, offering a near 40 percent premium to the hotelier's shareholders. And Providence Equity Partners last Saturday led a $48.8 billion takeover offer for Bell Canada - a deal that could go down as the largest leverage buyout in history.

Blackstone's highly anticipated IPO last month has largely failed to keep shares above the offering price. But, that hasn't discouraged rival Kohlberg Kravis Roberts & Co. from bringing its own flotation forward. KKR & Co., famous for its buyout of RJR Nabisco Inc. in the late 1980s, said Tuesday it hopes to raise $1.25 billion in an IPO this year.

Congressional action

Those are positive signs amid fears Congress might pass a bill that would tax private-equity firms as corporations instead of partnerships. That's also good news for investors, in part because the flood of acquisitions has been one of the major factors behind the record surge by major stock indexes this year.

"There's been a lot of noise over the past few weeks, but it is still a relatively favorable environment," said Eric Weber, a managing director with boutique management consulting firm Freeman & Co., which advises the investment banking industry. "These are some of the smartest people around, and if the economy takes a downturn, they'll have issues but still have flexibility."

Still, concerns remain that the market might sour on private equity deals. Threats of interest rates ticking higher and a lending squeeze linked to the subprime mortgage market have made some fixed-income investors jittery. The market has resisted a string of recent debt offerings.

Dutch supermarket group Royal Ahold had difficulties selling $650 million in bonds as part of the sale of its U.S. Food Service unit to a group of buyout firms led by KKR.

Blackstone and Lion Capital LLP were said to be having problems unloading $259 million of loans to acquire soft-drink maker Orangina. And this past week, KKR had some difficulty borrowing for its

$22 billion acquisition of British drugstore chain Alliance Boots PLC.

Some have interpreted resistance by investors as being the first signs the buyout boom has topped. Others believe it simply means a progression, and that private equity firms will instead take a more steady and slower approach than they had before.

If this does occur in the next few years, Blaydon and other private equity experts believe firms like Blackstone and KKR will still thrive. Any slowdown would mean valuations come down as well, and that - in many cases - would mean bigger returns for firms like Blackstone and KKR down the line.

"Everyone knows economies are cyclical, and private equity right along with it," Blaydon said. "They have the capital, and they would be thrilled to be investing when valuations come down. But, we are nowhere near that point yet."