Private Equity Releverages with a Vengeance

Warner Chilcott is paying $3.1 billion to buy the drugs business of Procter & Gamble. How much of that is its own money, and how much is debt? In the wake of the blowup of so many leveraged loans, one might expect the proportion of the sale price funded by banks to be low. After all, the banks don’t seem to be very keen to lend to anybody these days. But in fact, the banks are providing not half, not 75%, not even 95% of the total — they’re putting up a whopping 129% of the acquisition price.

Yep, Warner Chilcott not only has to put no money down to buy this asset, it also gets an extra $900 million to refinance existing debt. And there’s quite a lot of that, as you might expect from the fact that Warner Chilcott is owned by a who’s-who of the private-equity world, including Bain Capital and Thomas H Lee Partners.

This is being spun as good news. Marketplace’s Jeff Tyler interviewed Ken MacFadyen, the editor of Mergers & Acquisitions Journal:

MacFadyen sees the deal as a heartening harbinger for the banking industry.

MacFadyen: That’s a good sign to see that the lenders are active again.

Me, I’m not so heartened. I’d much rather see the banks’ money going into the real economy, where it can do some good, rather than being used to further lever up a company which was invented by private equity types and domiciled in the tax haven of Ireland.

The leads on this deal are JP Morgan Chase, Bank of America, Credit Suisse, Citigroup, Barclays, and Morgan Stanley. Remember those names, especially if and when any of them starts complaining about how little money they have to lend. Evidently they have no shortage of money if the borrower is one of their old friends in private equity.

Update: Angus Robertson has an excerpt from a Fitch report, under the headline “Investors Swarming Back Into Leveraged Finance Markets”. ‘Nuff said.

Comments

[Ricard:]

So, we have learned nothing over the past year...

Aug 25 06:21 PM

[prisser:]

The banks have learned plenty. This is a prime example of the consequences of moral hazard. If their bet pans out, they win big. If it fails, the taxpayer rides to the rescue.

Aug 25 07:23 PM

[Ricard:]

The banks knew this long before the troubles began last year...


On Aug 25 07:23 PM prisser wrote:

> The banks have learned plenty. This is a prime example of the consequences
> of moral hazard. If their bet pans out, they win big. If it fails,
> the taxpayer rides to the rescue.

Aug 26 02:39 AM

[tattors:]

ride'm cowboy! good the old way of doing biz is returning, the networking ties of the M&A will pull this thing back together again..I mean who cares if their silicone or real? We just need to keep the appearance good and perky for our foreign investors greedy appetites....

Aug 26 09:18 AM

[Bill L.:]

Great....

Well, you know what they say about sequels... they are always worse than the original...

Get ready for TARP 2: Judgment Day

Aug 26 10:07 AM

[ari5000:]

so basically once all these banks start loaning again, we can expect to see almost no tax revenues to benefit the U.S.?

Yep, sounds about right.

Aug 26 10:57 AM

[marklamb:]

"I’d much rather see the banks’ money going into the real economy, where it can do some good"

this sounds like something a politician would say.

Aug 26 10:58 AM

[stilicon:]

Good article. I concur : the boys are ready to do it again. Now, they have the assurance, that common folks will certainly have to pay for their next folly.
One thing worries me in this article : the remark about the evil, bad tax-heaven Ireland. This remark is really stupid. I won't discuss whether Ireland is indeed a tax-heaven. But more generally, Tax-heaven is the ultimate and perhaps the only way to oppose the follies of Big Government that put the western world in its current state. To denounce the existence of Tax-Heavens is to support the statists' aspirations to a totalitarian regime. So, in the end, I question very much the logic and common sense of the autor. Implicitly, this person seems to want more statist violences and meanwhile, denounces its consequences. Strange, not uncommun, but strange.

Aug 26 11:10 AM

[marklamb:]

also -- "further levering up a company which was invented by private equity types..." did felix even look at the financials?

prior to the p&g deal, warner chilcott posted $536MM in TTM EBITDA. the company had approximately $860MM in debt on its balance sheet, making its total debt/EBITDA ratio 1.60x

this is a very modest leverage ratio. i'd be interested to hear how much EBITDA p&g's drug business generates. even so, warner chilcott wasn't highly leveraged.

Aug 26 11:20 AM

[puravidavid...:]

When Humpty Dumpty (U.S. taxpayers and bond lenders) take that last final fall, all the king's horses and all the king's men won't put the financial markets back together again.


On Aug 25 07:23 PM prisser wrote:

> The banks have learned plenty. This is a prime example of the consequences
> of moral hazard. If their bet pans out, they win big. If it fails,
> the taxpayer rides to the rescue.

Aug 26 02:06 PM

[Analyste de...:]

Since the 3/9/09 Rally began, PSP is up +124% vs. +50% for SPY. What other 'private equity' ETFs, CEFs, or MFs should be considered/compared?

Aug 26 02:38 PM

[marklamb:]

i personally don't understand all of the above comments regarding the banks. as far as i can tell, no one knows the specific metrics of this deal (combined company EBITDA, total debt, etc).

it seems to me that people are taking the headline and assuming this deal is levered 10 to 1.

it's true that warner chilcott didn't need cough up any cash to purchase p+g's business. however - instead of simply accusing the lenders of "loose" standards, maybe it'd be a bit more prudent to dig deeper. perhaps the combined cash flow of both companies is sufficient enough to sustain the debt (gasp). as i noted above, warner chilcott was only levered 1.6 to 1 prior to this deal.

i don't claim to know everything about this deal, but it'd be refreshing if someone actually posted a few specifics before making a comment about financial armageddon.

Aug 26 02:51 PM

[Brian in Wi...:]

"this sounds like something a politician would say."

That sounds like something a private equity banker would say...

How exactly is it good for the economy for the banks to help someone lever up to 130% on a deal for a company already swimming in debt?

What new value creation will those dollars be responsible for?

It seems the focus of the banks is churning deals with cheap $$ from the Fed, which will not fix their problems and will exacerbate the problems for the economy as a whole...

I don't think anyone commenting on this wants to ban Private equity investing - it is certainly fair to question the logic behind this kind of deal though. Did we blow up the Fed balance sheet and hand tax dollars to the banks so they could survive so Goldman could be a depository hedge fund taking on tons of risk and to help private equity continue to inflate the asset bubble with cheap cash? Are we going the route of Japan but instead of funding infrastructure and long term investments we are going to trade a decade of growth for huge banker bonuses and future bankruptcies and bailouts?

Not a big fan of either approach, but this the incentives driving these deals a f'd up.

Aug 26 03:40 PM

[marklamb:]

in response to "Brian in Wilmington"

"a company already swimming in debt" ... as i noted previously, warner-chilcott's 1.60x total leverage is very low.

"what new value creation will these dollars be responsible for?" ... that's difficult to say, but p+g may have offloaded its drug business to focus more on its other segments. being as warner chilcott is a pharmaceutical company, they may be able to more effectively grow the division. it may increase their market share, help them expand into new segments, etc -- all of which are good for the company, its employees, and shareholders. basically, there are a ton of reasons why warner chilcott would want to do this deal - i sincerely doubt they'd lever up its balance sheet for no reason.

we're not talking about a complex cdo/hybrid security here. this is syndicated lending.

Aug 26 03:59 PM

[Robespierre:]

To expect the banks to behave differently while keeping the same players is my definition of insanity. These people will ripoff the taxpayers again with the full cooperation of the current administration and the regulatory minions.

Aug 26 04:29 PM

[Fighting Yoda:]

The Ponzi scheme bubble business is back. Of course the Fed and Treasury are going to backstop everything - everyone wants one more bubble and all losses will be wiped out.

Hype springs eternal.

Aug 26 05:21 PM

[jstratt:]

Outrageous again!

Aug 26 06:25 PM

[MichaelAK:]

When we have zero interest rates, money is starting to flow back to riskier investments. So the leveraged M&A could be coming back fast before Uncle Ben raises interest rates. However, I agree this does nothing for the economy and more then likely will be meaning layoffs for the existing employees. Also what are P&G shareholders getting out of this deal, nothing. Better course of action would to spin this drug business out and give shareholders a piece of the action.

Aug 26 07:40 PM

[Living4Divi...:]

A fool returns to his folly

Aug 27 08:33 AM