more private equity woes

[Michael Perelman <michael@xxxxxxxxxxxxxxxxx>]

This article emphasizes that an increasing share of profits must go to
pay interest on the debt with which the takeover deal has saddled the
firm

Zuckerman, Gregory and Serena Ng. 2007. "Boom Aside, Not All LBOs Look
So Hot." Wall Street Journal (8 June): p. C 1.
"Even as the buyout boom rolls on, a number of recent high-profile
deals are already showing signs of strain.  Among them: the $1.3
billion purchase of retailer Linens 'n Things Inc. by a group led by
Apollo Management LP; Avista Capital Partners' $530 million buyout of
the Star Tribune newspaper in Minneapolis; and the $17.6 billion deal
for Freescale Semiconductor Holdings by several buyout specialists.
Apollo's $6.7 billion purchase of Realogy Corp. also is raising
questions among some investors."
"... recent LBOs have included heavy dollops of debt, potentially
causing problems as bond yields climb and the U.S. economy runs into
new obstacles."
"Companies that have gone private in buyouts are generating cash that
exceeds their debt interest payments by just 1.7 times, versus 2.4
times last year and 3.4 times in 2004, according to Standard & Poor's
Leveraged Commentary & Data.  The ratio is at a 10-year low and shows
how the margin for error for companies is shrinking as their profit
growth is slowing."
"The stumbles from LBO firms with impressive track records are a
reminder that these deals can be challenging, especially when they take
place in cyclical or struggling industries where cash flows aren't very
stable.  "Our concern is if there is more of a slowdown in the economy
in the second half," more companies that have been taken private will
run into trouble because of the significant debt they have taken on as
part of the deals, says Jeffrey Rosenberg, head of credit strategy at
Banc of America Securities."
"This week, investors who purchased loans backing Avista's buyout of
the Star Tribune newspaper learned that the company's cash flow already
is running as much as 20% below Avista's original financial projections
for the deal, which closed just three months ago, according to someone
close to the matter.  Full-year results also are expected to come in
below projections."
"Some of the loans earlier this week dropped to around 96.5 cents on
the dollar before rebounding to around 97.5 yesterday, according to
data from S&P LCD.  Such levels indicate investors are worried about
the newspaper's ability to repay its debt."
"At retailer Linens 'n Things, which was bought by Apollo in February
2006, two consecutive quarters of poor results have sent prices of its
bonds down 15% since late February to around 84 cents on the dollar.
In an April report, Moody's Investors Service said the home-furnishing
retailer's cash flow in its 2006 fiscal year was only $30 million, well
below expectations of $166 million.  Robert DiNicola, chief executive
of the Clifton, N.J., retailer that is now part of Linens Holding Co.,
called first-quarter results "disappointing"."
"Linens is arguably showing some struggle -- but it was marketed to
lenders as a turnaround story -- so the jury is still out," Bear
Stearns's Mr. Consoli [s Victor Consoli, co-head of corporate-credit
strategy at Bear Stearns] says."
"Some traders are raising questions about Realogy, a residential
real-estate broker that was taken private by Apollo in April and is
battling a slumping housing market.  Realogy, which doesn't disclose
its results publicly, likely went through a challenging first quarter
with weaker sales and rising inventories, said debt research firm
CreditSights."
"A recent "alarming rise in existing home inventories" points to lower
revenue and margins for Realogy, CreditSights analysts said. Yields on
some of Realogy's newly issued bonds have climbed to 13.1% from 12.75%
when they were issued in April, as prices of the bonds have slipped,
according to S&P LCD."
"Freescale, meanwhile, reported weaker-than-expected results for its
first quarter as the semiconductor maker experienced lower demand from
its largest customer, Motorola Inc.  Freescale suffered a drop in sales
and cash flow, which prompted Moody's to cut its outlook on the company
to negative from stable, saying it expects Freescale's cash flow this
year to be weaker than anticipated, which would delay its debt
reduction."

--
Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael at ecst.csuchico.edu
michaelperelman.wordpress.com