The Wall Street Journal-20080125-Deal Journal - Breaking Insight From WSJ-com
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Deal Journal / Breaking Insight From WSJ.com
Help From Abroad
For U.S. Buyouts?
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Declining Borrowing Costs,
Marked by London Bank Rate,
Could Spark Renewed Interest
Merger-arbitrage investors may soon get some foreign aid.
As this blog has discussed many times, shares of companies in the process of going private -- such as Alliance Data Systems, Clear Channel Communications, BCE and Cumulus Media -- have been hammered as investors fret that the buyers will walk away.
The New York Post has a novel theory that might warm the hearts of the embattled arbs. It goes something like this: the marked decline in the benchmark London interbank overnight rate, or Libor, will lower borrowing costs for leveraged-buyout targets. (According to the theory, it could shave $300 million off Clear Channel's annual funding costs and $125 million from ADS's.) Those savings could rekindle buyers' enthusiasm for the deals and convince the private-equity firms to go through with them.
Of course, interest rates are falling for a reason: The Fed is trying to stave off a recession, which would likely crimp the results of newly private companies and hurt their ability to meet payments on the hefty debt loads they're taking on. Whether investors are going to buy the debt that is financing the buyouts -- and keep banks from losing a bundle -- is a different matter, too. Should they balk, the banks will still be forced to hold billions of devalued credit.
In any case, deal stocks have been coming back to life a bit lately, with most up a lot today. ADS, the poster child for arb angst, has soared 27% in the past week.
-- Dana Cimilluca
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Hedge Funds
Fall Off a Ledge
Even the hedge-fund brain trust has been caught off guard by the wacky and unpredictable markets of 2008.
U.S. equity hedge funds fell 5% on average through Jan. 18, according to a Reuters story citing Hennessee Group, a hedge-fund researcher and investor. Put in perspective, hedge funds haven't posted a loss of more than 1% in any January since 1993, when Hennessee started tracking the data. Last year, which had its fair share of volatility and market pain, hedge-fund performance topped 10%. (Those funds focused on international stocks, meanwhile, were down 8%, while merger-arbitrage investors suffered a similar drop halfway through January, the data show.)
That the S&P 500 was down roughly 10% through the 18th may be cold comfort for the endowments, wealthy individuals and others who pay hedge-fund managers hefty fees for returns that are supposed to leave the broader market in the dust and to "hedge" against exactly the kind of market decline experienced lately.
Those fees, of course, have enabled hedge-fund managers to make the chieftains of companies in the S&P 500 look like paupers.
It also won't come as welcome news to those who bought stock in Och- Ziff Capital Management and Fortress Investment Group, hedge funds that have had bumpy rides since they went public last year.
"Investors are getting fed up in hearing about absolute returns," but seeing red ink, a Hennessee official told Reuters.
-- Dana Cimilluca
