An outright buyout of Yahoo by private equity firms, the latest fodder from the M&A rumor mill, would test the debt financing market’s appetite for a “mega-deal.” The institutional loan market, once the piggybank for buyout barons, may only be able to provide $3 billion to $5 billion toward nabbing the $20 billion internet company, according to sources polled by Thomson Reuters LPC.
Yahoo’s board has yet to put out the for sale sign, but behind closed doors, board members are reportedly interested in a deal. And private equity firms have been circling. Two, Blackstone Group and Bain Capital, are even mulling a $25 billion bid to take all of Yahoo private, Reuters reported last week.
A $25 billion buyout would be by multiples the largest LBO since the financial crisis. Though private equity transactions have perked up since 2010, the LBO world has yet to see a “mega-deal,” one whose purchase price exceeds $10 billion. The biggest so far have been this year’s $7.2 billion buyout of Samson by KKR & Co. followed by the $6.3 billion LBO of Kinetic Concepts by Apax Partners, the Canada Pension Plan Investment Board and the Public Sector Pension Investment Board.
In Kinetic’s case, the term loan market provided $2.2 billion, or 35 percent of the purchase price. If Yahoo were to command those levels, its term loan would near $9 billion, something loan investors warn is not likely to happen.
“I think that would be insane. The market for loans is not that big,” said one investor regarding the possibility of a loan in the $7 billion to $9 billion range.
The largest amount that institutional investors have forked over this year has been the $2.7 billion term loan for the Del Monte buyout by KKR, a far cry from the more than $20 billion given for TXU Corp’s purchase in 2007. That’s because the market has shrunk due to vanishing CLOs and less interested retail investors.
Though CLO issuance has returned from near-death during the crisis, pricing nearly $12 billion this year, issuance is drastically below 2006’s $95.6 billion or 2007’s $104.7 billion. And given global volatility and risk retention rules that limit certain buyers, CLO formation will stay put at $12 billion next year as well, predicts Wells Fargo.
Meanwhile, retail investors, the hoped for replacement, have cooled to leveraged loans. After piling into loan mutual funds for 56 straight weeks, adding a total of $24.5 billion during that time, retail buyers shifted in August and have pulled out cash every week but one for the past four months. Net assets are now down to $38 billion, as of Nov. 30, according to Lipper FMI.
Given the smaller market, Yahoo would find it difficult to replicate HCA Inc.’s HCA.UL feat of getting a market setting institutional tranche, which consisted of a then-record $9.3 billion term loan B and a $1.25 billion European term loan, back in 2006.
Indeed, even the gentler sum of $3 billion to $5 billion will not be a shoo-in, according to investors. Much will depend on the capital structure of the buyout as well as its rating.
“It’s a different revenue model than we have seen before. It would require a big equity check, like 50 percent,” said another loan investor.
With Yahoo having lost its former glitter, pressed as it is by the likes of Google and Facebook, and its revenue steadily softening, loan investors say they will demand a hefty equity check underneath. Also, a good rating, such as a four B, would be helpful, as there is plentiful demand for higher-quality paper these days.
“I doubt investors would support a high leverage multiple,” said an investor.
Fortunately, for any takers of Yahoo, the company still solidly throws off cash to support a debt financing. The Internet giant is expected to generate roughly $1.5 billion in EBITDA in both 2011 and 2012, according to Thomson Reuters. That equates to a 2 turn of Ebitda for a $3 billion senior loan and 3.3 times for a $5 billion loan. By way of comparison, Del Monte’s senior leverage came to around 4.5 times.
With the right structure, the market should be open to a well-known name. The loan market has become more constrained since Del Monte and Kinetic were underwritten, but investors point to the innovative syndication of Kinetic as a model for a possible Yahoo deal, even if macroeconomic concerns continue to weigh or to exacerbate slightly.
Kinetic cast its net wide, splicing its original $2.2 billion term loan into a $1.63 billion U.S. term loan B, a 250 million euro carve out and a $325 million term C. The U.S. and euro TLB were made non-callable for the first year to attract cross-over investors from high yield bonds and the maturity on the term loan C was shortened to accommodate CLOs that could not commit to longer paper.
And having a new big liquid name in the market would be a positive for the loan market, which while seeing a flurry of activity for smaller loans has added few highly liquid names lately. That led a few investors to speculate the market could handle a term loan up to $7 billion, though most came in between $3 billion to $5 billion.
“It would be helpful, actually,” said another investor.
(Lisa Lee is a reporter for Thomson Reuters Loan Pricing Corp. in New York)