The Wall Street Journal-20080123-As Deal Spreads Widen- So Does Worry
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As Deal Spreads Widen, So Does Worry
Credit-market turmoil and recession worries have had many investment bankers predicting a steep decline in the volume of mergers and acquisitions in 2008 for months. Now, the steep drop in stock values has them worried about some of last year's deals as well.
A measure of investor confidence on these deals -- the difference in the bid and asking price, or spread -- on the stocks of a number of buyout targets suggests that investors are doubtful that some of the transactions will go through.
Yesterday, for instance, the spread on Clear Channel Communications Inc., which agreed last year to be acquired by private-equity firms Thomas H. Lee Partners LP and Bain Capital Partners LLC, widened $1.41 to more than $7. The spread on Alliance Data Systems Corp., which Blackstone Group LP agreed to acquire for about $6 billion, rose $1.64 to more than $21. And on the biggest buyout ever, the $33 billion acquisition of Canadian telecom operator BCE Inc. by a Ontario Teachers' Pension Plan-led consortium, the spread widened to more than $8.
Trading in the stocks has been volatile in recent weeks amid rumors the private-equity sponsors behind the buyouts or the banks providing the financing will jump ship.
"It was unthinkable in July that someone wouldn't close a big deal. Now it's thinkable and you have to factor that in," said Bob Profusek, who heads the M&A practice at law firm Jones Day.
The malaise also could upend another pillar of the investment- banking business -- initial public offerings. As stock prices drop, issuers have less incentive to tap the markets and may prefer to wait on the sidelines until conditions improve.
That could delay or derail a number of big planned issues, including Visa Inc.'s planned $10 billion offering and Talecris Biotherapeutics' planned $1 billion IPO. Issuers will get a sense of the appetite for stock this week with the IPO of risk-management specialist RiskMetrics Group Inc., which could raise as much as $266 million. The backlog of traditional IPOs filed in the past six months totals 95 deals valued at $24.5 billion, according to Dealogic.
The market volatility also could spell trouble for IPOs outside of the U.S. Investors in China are worried about a plan by one of China's biggest financial firms, Ping An Insurance Co., to sell over $20 billion of additional shares and debt -- just one of the fund-raising plans investors say has chilled their buying interest. In India, companies are expected to issue a record $16 billion of shares this year -- more than in the past three years combined. But some analysts said recent stock-market declines will force issuers to readjust their expectations.
For now, investors, in particular arbitrage traders who bet that announced deals will be completed, are more focused on the backlog of the agreed buyouts. In normal market conditions, these spreads are typically measured by no more than a few dollars.
A number of deal failures, including Cerberus Capital Management LP's unexpected move to drop its $4 billion takeover of construction supplier United Rentals Inc. and the decision by a J.C. Flowers & Co.- led consortium to abandon a $25 billion buyout of student lender SLM Corp., commonly known as Sallie Mae, has left many in the market suspicious.
"You can't believe anything any of these companies tell you," said one arbitrage trader. "It scares me."
That fear, coupled with concern about the direction of the market and the state of the economy, has prompted investors to largely ignore the reassurances of buyers and sellers that their deals are secure.
Restoring confidence will require at least one of these large transactions to close shortly. Casino operator Harrah's Entertainment Inc. is the most likely to go first. The deal's spread narrowed to $1.10 yesterday, on expectations it will be completed.
About 65 people attended a meeting yesterday at Manhattan's Le Parker Meridien Hotel, where Harrah's and its bankers marketed senior secured notes to fund the deal. One person who attended the meeting said all indications pointed to the deal closing, perhaps as early as Monday. But he wasn't sure there would be much of a market for the notes, likely leaving the banks stuck with a large amount of paper on their own books.
One deal under particular stress is Thomas H. Lee's and Bain Capital's $20 billion acquisition of radio giant Clear Channel. A group of banks that includes Morgan Stanley and Citigroup Inc. agreed to finance the deal. The transaction recently cleared a hurdle when it received Federal Communications Commission approval. Thomas H. Lee and Bain Capital have repeatedly said they stand behind the deal.
And yet, Clear Channel's shares are trading about 18% below the offer price. Some investors are worried the banks may walk away.
Any failure of more agreed-to deals might be a sign that 2008 will be worse for the deals market than many anticipate. This year, deal activity is down 31% in the U.S., according to Dealogic.
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Dana Cimilluca contributed to this article.
