The worlds largest leveraged buy-out the $45bn LBO of TXU Corp by a group of private equity investors got the go-ahead from TXUs shareholders on September 7.
Key to completion of this landmark deal has been the determination of Kohlberg Kravis Roberts, arguably the worlds best known private equity firm even if it would rather remain in the shadows.
KKR first made the headlines two decades ago when it masterminded the hostile acquisition of RJR Nabisco in 1988. That $25bn deal was the largest LBO the world had seen (and would be worth around $44bn in 2007 dollars if adjusted for inflation).The controversy surrounding the LBO particularly the takeover fight with Ross Johnson, CEO of RJR Nabisco, and the visceral urge of KKR to close the deal became the subject of a financial bestseller, Barbarians at the Gate: the Fall of RJR Nabisco.
Talk to bankers who work with KKR today and youll hear similar (if muttered) expressions of the difficulty of maintaining relationships with such an aggressive, determined and powerful entity.
Life before the subprime crisis
The £11.1bn takeover of UK pharmacy chain and drug distrubutor Alliance Boots by its deputy chairman Stefano Pessina and KKR is a case in point. The buy-out was announced when the leveraged loan market was hot and the US subprime crisis had yet to scare the global capital markets.
The bankers who had won the mandate to lead the £9.2bn of debt for the deal celebrated, hailing it as the deal of the year.
At the time the market was also rife with covenant-lite transactions, which give private equity-owned companies more financial freedom. KKR insisted that the arrangers Bank of America, Barclays Capital, Citigroup, Deutsche Bank, JP Morgan, Merrill Lynch, Royal Bank of Scotland and UniCredit should offer the leveraged loan as such a covenant-lite facility.
The deal was launched at super-tight margins and, according to institutional investors that were offered the deal, also at high leverage a point supported by the fact that the arranging banks refused to give details of just how high.
And then the market turned.
The result? An already aggressive structure looked deeply unattractive to funds. By August 3, the arrangers were forced to abandon syndicating nearly all of the deal. Only a heavily discounted £750m mezzanine tranche was kept in the market.
Since then, the non-bank bid for leveraged loans has all but disappeared.
While those close to the loan blamed the lack of interest in the deal on risk-aversion stemming from the US subprime mortgage crisis, others in the market claimed that because the deal was so aggressive it would have failed anyway.
The mezzanine piece is still being marketed to buyers, but even bankers on the transaction have suggested that a successful syndication will be an uphill struggle.
But, call it brilliant or call it market-wrecking, KKR is sitting pretty.
It has got its money, and the debt is on the balance sheets of the eight banks in charge of the deal, clogging up their abilities to do other transactions, and undermining the confidence of others.
As a gesture to take account of the change in market conditions, the banks are understood to have asked KKR to inject more equity into the deal and reduce the leverage. KKRs response is said to have been remarkably forthright: "What is the job of a syndicate?"
The result: no more equity.
The arrangers plan to return to market when conditions stabilise. But many doubt if a successful transaction is possible. "We were never going to buy this paper," said one fund manager. "It was not the margin or the size that upset us, it was the leverage, and that is not going to change.
"The banks would have struggled to get this deal away in a strong market. In a soft market it was impossible, and I cannot see how we will get comfortable with it at a later date."
Better luck with ProSiebenSat.1
The takeover of Alliance-Boots cannot be described by KKRs bankers as the private equity firms finest hour, even if it did raise money at attractive levels.
However, bankers agree that most KKR transactions are successes. The biggest European leveraged financing of the year so far, now that Boots has failed in syndication, was the Eu7.9bn deal for the buy-out of German broadcaster ProSiebenSat.1.
Launched in May, the deals margin was flexed down after the loan was oversubscribed, including an order of Eu1.25bn from Citigroups wealth management arm.
The Eu3.3bn leveraged loan for KKRs acquisition of German forklift truck maker Kion was also flexed down, both in structure and price, after accounts poured into the transaction. The Eu300m 10 year mezzanine part of the deal was to be replaced by additional second lien and senior debt a move that will mean a fall in the overall cost of the transaction for KKR.
KKR can demand the tightest terms from its banks and has even been able to convince non-bank investors to accept its tighter terms and waivers on existing deals.But now that the market has changed and the balance of power has shifted to the buy side, KKR will find itself bowing to the pressures of investors, rather than dictating their terms.