The Wall Street Journal-20080131-Deal Journal - Breaking Insight From WSJ-com
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Deal Journal / Breaking Insight From WSJ.com
Full Text (564 words)Alliance Data:
Familiar Ring
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This Isn't the First Time
Blackstone Backed Out
And Arbs Lost a Bundle
'Those that ignore history are doomed to repeat it." It is a saying that may have particular resonance today with merger-arbitrage investors.
Any arbs that had shares of Alliance Data Systems must have lost a bundle when Blackstone Group signaled Monday that it may not complete the $6.4 billion buyout of the transaction processor.
Those losses maybe, just maybe, could have been avoided with a little historical research. That is because, contrary to claims by Blackstone Group, the buyout firm had walked away from at least one other pending deal before the credit crunch that began in June.
Back in the 2000, Blackstone pulled the plug on another buyout, the $352 million purchase of security firm Kroll-O'Gara. That was an even more painful experience for some arbs than Alliance Data.
Shares of Kroll-O'Gara fell roughly 62% below the original buyout price after Blackstone and its partners among Kroll-O'Gara's management, citing deteriorating business conditions following the deal's announcement, invoked the material adverse change clause in the agreement that enabled the buyers to get out of the deal. (ADS shares are a mere 49% below Blackstone's May offer of $81.75 a share.)
The market backdrops in the two cases aren't entirely dissimilar. The Kroll-O'Gara deal fell apart in the middle of April 2000, a month after the stock market began a decline. That decline heralded the end of an historic M&A surge, much like the bursting of the credit bubble last year has put the kibosh on another record M&A run.
(One of Kroll-O'Gara's main units was an information-security provider called Securify, and the tech downturn may have cooled Blackstone's interest in that business.)
Blackstone says it has no choice but to walk away from the ADS deal if regulators don't back away from onerous demands. With ADS having filed suit, we may soon see what a judge thinks of that argument.
-- Dana Cimilluca
Buyout Backlog:
Are We There Yet?
In "The Innocents Abroad," Mark Twain once encouraged his fellow travelers to infuriate their tour guides by asking about each ancient sculpture, bronze or mummy, "Is . . . is it dead?"
That brings us to the backlog of buyout-related leveraged loans, daily becoming a dustier and more-entrenched memory of better days in the world of debt.
So confirms private-equity partner Anthony DiNovi of Thomas H. Lee Partners, who disclosed at the Dow Jones Private Equity Analyst Conference in New York the dispiriting news that the debt backlog created by the credit crunch still stands at around $250 billion.
And the Fitch forward high-yield calendar -- which measures how much issuance is actually close to market for sale -- stands at just $51 billion, with most of the issues slated, vaguely, for sometime in 2008.
In October, the U.S. leveraged-loan backlog was an estimated $380 billion. Back then, underwriters at least managed to sell off $60 billion in a month.
The inability to sell these loans now continues to cause paralysis. One banker who works with privateequity firms told us, "We have to flush this backlog in order to underwrite new debt. No one wants to come in, put $100 to work, and find they have $95 the next day. If you get rid of the current supply, then we can start originating again."
-- Heidi Moore
