The WSJ.com (paid article) has an excellent piece – called "Buyout Bonanza" – that takes a look at the perils of the buyout craze. That is, Corporate America may be on the fast-track for rapid debt accumulation.
Funnily enough, the article looks at the buyout of a gambling company, Harrah's Entertainment, Inc. (NYSE:HET). The deal has a value of $17.1 billion, of which about $10 billion consists of debt. True, the company has gobs of cash flow: $2.5 billion a year. Yet, this still amounts to more than 8X the value of the debt. That's certainly in the risk zone. Keep in mind that the average deal has a ratio of 5.7X.
The problem is that – with huge amounts of private equity – there are likely to be many more huge companies that go private and as a result, take on huge amounts of debt. In a way, the end of 2006 was a highlight of things to come.
However, if the economy falters – which it is bound to do – we could see a variety of marquee companies dive into default. But so far it's a gamble a myriad of big companies are willing to take.
Tom Taulli is the author of various books, including the Complete M&A Handbook and operates DealProfiles.com.
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Reader Comments (Page 1 of 1)
12-28-2006 @ 12:17PM
Don said...
Corporate America is the Debtors" Donut-Hole....BY Don !
A debt is a bet between N&S ; those who believe in Santa Claus and those who are NOT !
The Apple of our eye, convinced us ,the `apple-option ' was Good.....ummmmmmmmmnot !
For those who believe in the three li-ittle pigs and the Big BAD Wolf , a Brick-House is built like-a-ma~on and more rewarding than a free-scale of hey-EH and/or boo-ya tw-gig-ga branches ! The risk-ca`is `art-thou ' and the reward ,Devine!
al-la I wan for business in 2007 is Ps'& Qs' of mind !
12-28-2006 @ 1:27PM
Jim Beske said...
Aside from the fact that you used the word "funnily" I'm pretty much in agreement. I better there will be plenty of default but doubt it will last much longer then several months before they see a turn around back to the upside.