First Data Corporation: Mega Bucks M&A Coping with Liquidity Meltdown

Just after KKR announced in April 2007 that it was acquiring First Data Corporation (FDC) for $34.00 in cash, I wondered why the stock didn't shoot up all the way to $33.25/40. At first I thought the market was saying that this particular deal would take longer than usual to close. In early July, FDC climbed to about $33 but was still shy of a reasonable trading price based on the acquisition offer. Last Friday, FDC closed at $31.48.

We now know that the market is signaling some uncertainty in the viability of the deal closing altogether. The problem seems to be in the ability of the banks to resell the corporate debt. Apparently some on Wall Street were aware of this back in April. There are several deals that the market has priced for the chopping block and in each case for a different reason. The one common denominator is the re-pricing that investors are demanding for the risk premium on the debt.

Cost of Debt

In the $28 billion FDC deal, investors are claiming that they are due a higher risk premium because there is uncertainty about the future growth potential which was factored into the purchase price. Should future revenue and earnings growth be lower than predicted when the deal was structured, the debt level would be high enough to downgrade the remaining debt, hence; a risk premium is warranted.

Amongst the original terms that investors want to negotiate or renegotiate with KKR alias FDC is allowing FDC to borrow from Peter to pay Paul. In-other-words, due to the heavier than comfortable debt load, there was always a possibility that FDC would have to borrow more in order for KKR not to default on its original loan. Now investors are reviewing this in light of the subprime issue as a greater risk and want up to 2% more for their money.

Two percentage points increase means one of two things. Either the deal falls through or the banks that committed to the bridge loans take a hit on the difference between what KKR (FDC) pays and the interest that the investors receive. There is another very unlikely possibility, whereby the bridge-loan-banks hold the debt for themselves, unloading the debt slowly as market conditions improve.

Litmus Test

The reason I'm writing about FDC, though there are several others facing the same predicament, is because KKR has until mid September to close the deal. Being that this is the first mega bucks deal that is contending with a new financing environment, it is crucial to see how KKR works through this dilemma. However it turns out, this could be setting a precedent for others like; Ceridian (CEN) / Thomas H. Lee Partners $5.2B deal, Tribune Co. (TRB) / Sam Zell $8.2B deal, Affiliated Computer Services (ACS) / Deason & Cerberus Capital Management $8.2B LBO and others.

For now, the FDC/KKR $28B deal is also the largest on the chopping block as well. I doubt that the TXU Corp. (TXU) / KKR $44B deal is in financial jeopardy; there the legislative hurdles are more compelling than anything else. If the financing wasn't 100% guaranteed, KKR would not have bothered to start engaging in the clearance process. In a previous article I explained why the Tribune (TRB) deal has to go through as well. I'm still wondering though, who will be saddled with the risk premium.

Disclosure: Author is long TRB

FDC 1-yr chart