Friday, May 21, 2010

Good news and bad news for First Data Corp.....

The good news is that they might not have to worry about pulling off a successful Initial Public Offering!

The bad news is, that's because there might not be any equity to be the "O" the in the IPO.....

ummm....



Bloomberg today, discussing the recent wreckage in the LBO-debt market:

First Data’s $2.4 billion of 11.25 percent notes due in 2016 have fallen 17.75 cents this month to 66.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The credit card processor, based in Atlanta, which KKR & Co. paid $27.5 billion for in 2007, lost $240 million last quarter and failed to improve profitability, said Stan Manoukian, an analyst at Independent Credit Research in Los Angeles. “Assumptions on revenue and earnings growth made during the LBO purchase by KKR have proven to be a leveraged fantasy.”
A fantasy indeed. I spoke recently with a large pension fund, whose administrators were being wooed by yet another slick LBO fund. They were actually "expressing gratitude" for being able to invest with the fund. Dumb money is not aware of the diminishing returns that lie ahead for private equity, thanks to:
1. MUCH higher equity portions of deals. Like a homeowner who puts 30% down, the upside from leverage is much lower than if he'd put 5% down...
2. The "L" in LBO is tougher to come by. Banks have been torched by previous buyout mania, in which they were "lucky" to be involved in deals where risk was under-priced. Now they're going to have so much debt-to-equity conversions on their hands, the lending side will be much more cautious.
4. With cash earning nothing on corporate balance sheets, the "hurdle rate" for acquisitions is getting lower by the day. That will compete with private equity for deals, pushing prices up and future returns down...




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