A $100bn leveraged buy-out no longer seems unthinkable. But what about a $100bn exit?
The co-founder of Carlyle, a private equity group, predicts an LBO that size within two years. Vivendi had talks about a deal more than half that scale. Home Depot had to deny it was a target. With an enterprise value of about $89bn, adding a premium would have got close to the magic number.
There are less than 60 non-financial public companies worldwide of that size. But if things fell into place, it is feasible that private equity groups could find, say, $25bn of equity. Piling on $75bn-plus of debt would be tough, but not unimaginable in today’s extraordinarily generous markets.
Yet private equity investors have to cash out of deals, too. A conglomerate such as Vivendi could be broken up. That would not, however, make sense for a company such as Home Depot. A $100bn trade sale would be virtually impossible. And while some financial engineering might be achievable, borrowing more – one way for private equity to claw back a big chunk of money early – could be a challenge with already stretched lenders and the risk of tougher market conditions.
Private equity might be able to make the business look better. Even so, an initial public offering exit would risk triggering indigestion. The most a US company has raised is the $11bn by AT&T Wireless at the end of the 2000 equity frenzy. Any IPO of a company with $60bn-plus in equity value would have to approach that, given the need for a 15-20 per cent float. Even then, a complete, staged exit from the remaining stake could take longer than private equity likes.
The ability of debt markets to swallow higher valuations than public equity markets might make a 12-figure LBO possible. But unless their appetite for IPOs shifts dramatically, those same, more cautious, stock markets could block the exit.