Doubts about planned leveraged buyouts could remake the rules that have guided deal making during an unprecedented boom.  11:38 p.m.

• Home Depot May Get Less for Supply Unit

• Banks Begin to Retreat From Financing Offers

Investment Banks Pull
Deal-Financing Offers

Slew of Retreats Strains
Once Healthy Relations
With Private Equity

By DANA CIMILLUCA and DENNIS K. BERMAN
August 10, 2007; Page C2

Choking on a massive backlog of pending private-equity financings and a choppy credit market, investment banks are rapidly retreating from offers to finance other deals in the works.

In a slew of recent auctions, investment banks have yanked back so-called stapled-financing packages used by sellers’ banks to attract private-equity bidders.

The seller-financing is called “staple” financing because it is often physically “stapled” to offering documents. The deals number at least five and include Morgan Stanley’s sale of cable company Insight Communications Co. and Goldman Sachs Group Inc.’s sale of Goodman Global Inc., a Houston-based maker of heating products that is part owned by private-equity firm Apollo Management LP.

Staples have long been touted as a way to provide a “floor” price for potential buyers, in the absence of other financing sources. But the recently pulled offers show how ephemeral such offers truly are. And that is straining the relations between private-equity firms and investment banks that serve them. Those relations had been harmoniously profitable when the volume of deals surged to record highs earlier this year.

In the case of New York-based Insight, Morgan Stanley’s refusal to fund the deal on the terms it originally offered has caused tension between the firm and Insight owner Carlyle Group, people involved in the auction said.

Morgan Stanley originally offered a financing package of 9.25 times Insight’s annual cash flow. After demand in the high-yield market evaporated this summer, it reduced that to 7.5 times before pulling the offering altogether.

Morgan Stanley or another bank could still end up financing the deal, one person familiar with the matter said. Final bids for Insight, which was expected to fetch as much as $2.5 billion, were due Wednesday. It is unclear whether Morgan Stanley will be able to find a buyer without the financing package. Time Warner Cable Inc. could still put in a winning bid for Insight.

Banks are pulling the financing because of larger problems in the market. Wall Street has committed to funding some $225 billion or more of pending leveraged buyouts, meaning the banks will be on the hook to finance them if debt investors pass. Kohlberg Kravis Roberts & Co., which has agreed to more deals that any other buyout firm this year, is taking a particularly hard line. It is forcing banks to honor their commitments on loans and bonds whose terms investors have begun to find nearly impossible to stomach.

Faced with the possibility of having to use their own money to finance a big chunk of those deals, the banks are turning their backs on new commitments.

Already, the market turmoil has claimed other auctions as victims, including the sales of Virgin Media Inc., Cadbury Schweppes PLC’s U.S. drinks business and Nexstar Broadcasting Group Inc. They have been shelved pending a more hospitable financing market.

Representatives of Carlyle, Morgan Stanley and Goldman declined to comment.

Write to Dana Cimilluca at dana.cimilluca@wsj.com and Dennis K. Berman at dennis.berman@wsj.com

RELATED ARTICLES AND BLOGS

Related Articles from the Online Journal

•  Corporate Buyers Hit Gas on Deals

Blog Posts About This Topic

•  TD Bank Leads H1 2007 Equity Underwriting  financialsector.blogspot.com

•  Why Is Home Depot Back at the Table  dealbook.blogs.nytimes.co

TPG Hires Former JPMorgan M&A Co-Head Dag Skattum - Source
CNNMoney.com - July 27, 2007
The news comes a day after JPMorgan said it had appointed two co-heads to its M&A practice for the region Europe , the Middle East and Africa .
JP Morgan’s Skattum to join TPG-sources Reuters
all 8 news articles »

The end of the credit party

The once-endless stream of cheap credit is ending; buyouts, corporate deals take a hit.

By Grace Wong, CNNMoney.com staff writer

July 27 2007: 11:04 AM EDT

LONDON (CNNMoney.com) — Dealmakers, investors and home owners in the United States are facing a grim summer as conditions for borrowers get worse.

Until recently, there has been a seemingly unlimited supply of cheap money to fuel leveraged buyouts and other takeovers. There was also an easy flow of mortgage money available before the housing market turned south and the crisis erupted in subprime mortgages made to borrowers with poor credit.

A trader reacts to Thursday’s selloff on Wall Street, where credit concerns sent the Dow industrials tumbling 311 points, the 2nd biggest loss of the year.

Video More video Was Thursday’s stock sell-off a one-day event or part of a longer trend? Play video

But now investors are showing a greater disdain for risky debt - and fears about a looming credit crunch have shaken investor confidence worldwide. The Dow Jones industrial average plunged 311 points Thursday - its second-worst day of the year - and sent global stock markets reeling. The Dow opened lower Friday as well but later stabilized and was little changed in mid-morning.

Besides triggering a global stock selloff, the jitters are casting a shadow on the buyout boom and could slow down everything from private equity buyouts to corporate restructuring plans.

Housing slump gets longer, and longer …

The housing market, meanwhile, is still struggling to find a bottom. The subprime meltdown started the worries in credit markets - and the extent of the problems in the subprime mortgage market remains uncertain.

“The ultimate outcome of the decline in mortgage credit quality is not wholly predictable,” Moody’s Economy.com said in a July 26 report. While there are efforts being made to forestall the surge in foreclosures, “the downside risks outweigh the positives,” the report said.

Credit markets have been roiled as investors have begun shying away from risk, demanding better terms on corporate bonds and loans, meaning the old days of cheap, easy money for corporations may be past.

“This is part of a process of removing liquidity and increasing the expected returns required of people to tolerate risk,” Charles Diebel, an analyst at Nomura International, said about the turbulence in the market.

Tighter credit is troubling to investors for two reasons. It’s likely to slow the buyout boom that’s helped prop up stock prices. And it could raise the cost of borrowing for companies, hurting corporate earnings. To date, there have been roughly 20 buyout-related debt deals that have been postponed as credit markets have tightened.

The battle to be ‘King of the Street’

Earlier this week, Chrysler delayed a debt sale related to its takeover by Cerberus Capital Management. The sale of $12 billion in loans underwritten by JP Morgan (Charts, Fortune 500), Bear Stearns (Charts, Fortune 500), Goldman Sachs (Charts, Fortune 500), Citigroup (Charts, Fortune 500) and Morgan Stanley (Charts, Fortune 500) was put on hold, according to Reuters Loan Pricing Corp. - although Cerberus said its purchase of Chrysler would still be completed in August.

The wave of credit worries is also upsetting corporate plans in
Europe. British pharmacy giant Alliance Boots, which is being taken over by Kohlberg Kravis Roberts and an Alliance executive, ran into trouble financing its buyout earlier this week.

Britain’s Cadbury Schweppes said Friday it’s delaying the sale of its beverage unit because of troubles in the debt markets. The company said it pushed back the timetable of the sale “to allow bidders to complete their proposals against a more stable debt financing market.”

Now there are concerns the darkening mood in the debt market could hit other big deals in the pipeline. A number of high-profile buyouts still need to be financed, including the $28 purchase of wireless phone company Alltel (Charts, Fortune 500) and the $44 billion takeover of Texas utility TXU Corp (Charts, Fortune 500).

“Clearly, deals will get done. But capacity again has become an issue. Syndicating a $5 billion loan once again seems daunting, arrangers say, to speak nothing of a $10-15 billion credit,” Standard & Poor’s Leveraged Commentary & Data said in a note Thursday.

If financing for buyout firms dries up, overall deal activity would be hit hard. Private equity firms have announced about $782 billion in deals this year, or about a quarter of worldwide deal activity, according to Thomson Financial.

The weak conditions also come when buyout firms may start crowding the exit doors, which would make it more difficult for other deals coming along.

Given the length of the current merger wave, which started in 2003, the M&A market is already ripe for a drop off, according to Scott Moeller, a visiting professor of finance at Cass Business School.

“At some point, this market will go down, and because of the way liquidity has driven this merger wave, when we have the fall - it’s going to be steeper, and the drop is likely going to be faster than in the past,” he said.

Private equity firms typically hold their investments for three to five years. The question now is will they be forced to start unloading the firms scooped up in the recent buying spree sooner than they had wanted.

It remains to be seen what will trigger the selling wave among private equity firms, but when liquidity starts to dry up, “everyone is going to rush to the exits,” Moeller said.

WFCDebt fears threaten Cadbury sale of drinks division
ic Birmingham.co.uk - 3 hours ago
Cadbury Schweppes’ proposed £8 billion sale of its US drinks business could be under threat as bidders struggle to raise debt in tightening credit markets, it was claimed yesterday.
Cadbury halts £7bn US drinks sale Telegraph.co.uk
Cadbury Schweppes Extends Wall Street Journal
Financial Times - BBC News - Reuters.uk - RTE.ie
all 83 news articles » CSG

Debt fears threaten Cadbury sale of drinks division