What Market Meltdown? Let's Do a $19 Billion Buyout
(Bloomberg Opinion) -- With impeccable timing, the private equity industry has agreed a jumbo leveraged buyout just as markets have turned dramatically. It’s a bad look, and Advent International and Cinven will have to strain every sinew to make their 17 billion-euro ($19 billion) deal for Thyssenkrupp AG’s elevator business pay off.
Germany’s Thyssenkrupp is a distressed seller but the industrial conglomerate ran the auction with finesse, using a high price from Finnish rival Kone Oyj to stimulate the bidding in the early stages. Kone benefited from more potential merger savings. It also faced antitrust hurdles. Hence the vendor put two buyout consortiums into the last round to battle it out. Regulatory clearance became irrelevant and the fight came down to money. Result? Advent and Cinven paid the price that Kone was mooting, without the attendant antitrust uncertainty.
The sale alleviates Thyssenkrupp’s debt burden. It doesn’t address the weak profitability of its remaining operations. Activist shareholder Cevian Capital gets the breakup it sought, but Thyssenkrupp’s shares are at their lowest since 2003.
The puzzle is why Advent and Cinven were willing to pay nearly 1 billion euros more than the rival consortium, which included Blackstone Group Inc. In fact, the deal isn’t as expensive as the big number suggests. It works out at 16 times the asset’s 1.1 billion euros of Ebitda for this year, as forecast by Jefferies. Peers were trading on 18 times before this week’s market correction, according to the broker.
The new owners should be able to lift the elevator maker’s Ebitda faster than its recent low single-digit growth rate, given Thyssenkrupp couldn’t afford much investment. Suppose Ebitda after five years is 1.4 billion euros and the business fetches a peer multiple on sale. The unit would be worth 8 billion euros more than its acquisition price.
Advent and Cinven would juice that return with leverage. The predictability of revenue from servicing elevators means the asset can probably sustain more debt than the average buyout. Borrowings of about 8 times Ebitda would leave the consortium putting in 8 billion euros of equity. So they could plausibly double their money on exit, which equates to a mid-teens internal rate of return. If there was room to pay down debt along the way, a return approaching 20% might be possible.
There are a lot of ifs and buts, though. At such levels of borrowing the consortium is probably relying on so-called “payment-in-kind” notes, which roll up interest into the sum to be repaid on maturity. If that financing fell due before it was time to exit, there would be a need to refinance or sell assets.
Elevator businesses are attractive to lenders given that lifts will always need maintenance. Still, the current market conditions are scarcely helpful here. And while Advent and Cinven are no amateurs, it’s natural to ask what value they see that Blackstone did not.
Big deals are so scarce that private equity will pay up to secure them when they become available. The timing is striking all the same. U.S. energy group TXU sold to private equity for $48 billion before the last crisis, while pharmacist Alliance Boots went for 11.8 billion pounds ($15 billion at today’s rates). TXU went bust. Advent and Cinven will hope this deal is remembered for the right reasons.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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