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Having taken over large swathes of industry this decade, it is easy to forget that private equity is, at heart, a trading business. The sponsors selling Alltel to Verizon Wireless just over six months after paying $27.5bn for it are going back to basics and grabbing an opportunity to exit.
The deal is a good one but it was not supposed to be this way. When TPG Capital and Goldman Sachs announced their deal in May 2007, the buy-out boom was in full swing. Alltel was a well-run but mid-sized US wireless operator that might make a decent vehicle for, say, industry consolidation and then an eventual sale to a larger competitors.
Roll on one year. Alltel has bettered profit growth estimates but remains a second-tier operator. It missed out on the spectrum auction in January. Meanwhile, Standard & Poor’s LCD, a leverage finance data provider, estimates the banks that financed the deal – which included Goldman – still had $6.7bn of high-yield bonds on their books. Both sponsors and banks faced the prospect of hanging on while Alltel’s larger competitors muscled in on its market share.
The decision to sell amid a relative lull in the credit squeeze is a sensible one. The buyers make almost 1.3 times their investment – no home run, but more than face-saving. Creditors, while not made whole, obtain a mark-up on the debt’s traded value.
As for Verizon, having resisted being drawn into a bidding war at a time when private equity’s ammunition seemed infinite, it can now swoop in and use expected synergies to justify deals. That helps private equity when it comes to exiting investments made in the boom. It does not, however, bode well in terms of competing for future acquisitions.
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