Through the Fly's Eyes: M&A Financing
From Larry Ramer of Theflyonthewall.com
Banks Getting Better Financing Deals, But Not Pulling the Plug Yet
So far, it seems that banks are not pulling the plug on merger and acquisition deals that were in place prior to the credit crunch. In some cases, however, lenders are demanding – and getting – more favorable terms from the companies and private equity firms whose deals they are financing.
For example, banks are demanding concessions from private equity firm KKR, which is buying First Data Corp. (FDC) for $24B. KKR may be willing to remove covenant-light and PIC toggle terms in order to close the deal, according to a report in today’s Private Equity Hub. In the case of the sale of Home Depot’s (HD) construction-supply unit, it was the seller who made concessions to lenders, as Home Depot cut the price for the unit by 18%, agreed to guarantee $1B in debt and will buy back 12.5% of the division for $325M.
As yesterday’s “Deal Journal” in the Wall Street Journal points out, investment banks would hurt themselves by torpedoing mergers and acquisitions. If all the deals from 1H07 are completed under current terms, investment banks stand to make $11.8B in fees. So firms like JPMorgan (JPM) and Goldman Sachs (GS) are certainly not going to nix deals unless they really feel they are too risky to be salvaged.
However, there are some signs and speculation that it may be easier for foreign banks to supply credit for deals than U.S. banks. Gerdau Ameristeel Corp. recently switched from a financing package for its acquisition of Chaparral Steel (CHAP) that was exclusively supplied by JP Morgan, to a financing deal with mostly banks from outside the U.S. Gerdau was able to obtain terms that are “at least as favorable” as its original deal, the company reported. In addition, the Wall Street Journal reported on Wednesday that Asian banks have been hit less by the subprime crisis than American banks, allowing Asian lenders to more easily finance deals.
It’s only been several weeks since the subprime crisis began to really affect large U.S. banks, and the situation could change quickly. (For example, action or inaction by the Fed on September 18 could really alter the whole picture). Up to this point, however, no big deals have fallen through, although there does seem to be a trend of deal terms being changed to help lenders.