About 20 years ago, KKR fought hard to win the biggest buyout in history (at the time) – that is, the $25 billion purchase of RJR Nabisco. It was a crazy deal that ultimately turned into a best-selling book, Barbarians at the Gate: The Fall of RJR Nabisco
Unfortunately, the RJR transaction turned out to be a dud. Actually, the company nearly went into bankruptcy. For the most part, the company had too much debt, which was a dangerous thing as the economy slowed down.
It was a tough lesson but KKR went on to post strong returns on subsequent deals. Right?
Unfortunately, it looks like history is repeating itself. As should be no surprise, EFH is coming under tremendous pressure. Demand for its utility services is falling off. At the same time, there is the pain of falling energy prices. The upshot: lagging cash flows. Yes, this is the enemy of private equity deals.
In fact, this week EFH announced its Q4 results, which saw a net loss of $8.86 billion, according to the Wall Street Journal. Over the past year, revenues went from $2.29 billion to $2.36 billion.
Because of the deterioration, KKR said it has discounted the value of its EFH investment by a hefty 30%.
Regardless, KKR and TPG are showing optimism (of course, for the long-haul). However, if the RJR deal is any indication, this may really be false hope. Simply put, highly leveraged mega deals can be extremely difficult to pull off, especially when the economy is in the worst shape in decades.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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