An Early Glimpse Of Big-Deal Performance

You can’t go to an industry conference these days without hearing at least one limited partner lament the disappointing performance expected from vintage 2006 and 2007 funds. Too much money put to work at too high a price in the early months of those vintages; then came a credit crunch that deflated those wonderfully lofty leverage multiples and that also put the kibosh on risk-reducing dividend recapitalizations.

I decided to put that assessment to the test in some minor way. I lined up the 10 largest LBOs that closed since January 2006 and whose targets file earnings reports with the Securities and Exchange Commission. In reverse size order, those 10 are Energy Future Holdings Corp. ($44.4 billion deal, closed in Oct. 2007); HCA Inc. ($32.1 billion, Nov. 2006); Kinder Morgan Energy Partners LP ($27.6 billion, May 2007); Harrah’s Entertainment ($27.4, Jan. 2008); First Data Corp. ($27.0 billion, Sept. 2007); Alltel Corp. ($26.9 billion, Nov. 2007); Freescale Semiconductor ($17.5 billion, Dec. 2006); Intelsat Corp. ($16.0 billion, Feb. 2008); Univision Communications ($13.5 billion, March 2007); and Aramark Corp. ($8.2 billion, Jan. 2007).

I then built a spreadsheet to house their most telling performance metrics through the end of the first quarter. I also obtained valuation data for five of the 10. My primary source: the first-quarter reports of publicly-traded investment funds managed by Apollo Management (a participant in one of the 10 transactions) and Kohlberg Kravis Roberts & Co. (a participant in three of the 10).

So how are these 10 companies, which collectively owe some $170.0 billion in long-term debt, doing? So far so good, although my spreadsheet features plenty of footnotes and caveats that I’ll highlight here. Together, the 10 SEC-filing companies generated an estimated $23.0 billion in revenues in the first quarter, up 4.1 percent from $22.1 billion in the year-earlier period. For all of 2007, they generated estimated revenue of $93.0 billion, up 2.2 percent from $91.0 billion in 2006.

Kinder Morgan Energy Partners scored the biggest first-quarter gain in revenue, logging a 25.3 percent gain to $2.7 billion; bringing up the rear was another energy company, Energy Future Holdings Corp., which saw a 52.8 percent drop in first-quarter revenue to $787 million. Year over year, Harrahs Entertainment took first place, posting a 13.8 percent rise in revenue to $8.1 billion. Energy Future Holdings Corp. again lagged, logging a 26.4 percent drop to $8.0 billion.

It gets a little trickier presenting EBITDA tallies for the collection of 10. Not all the companies provided EBITDA in their filings, and those that did often presented adjusted or consolidated figures that are usually higher than plain-vanilla EBITDA. In the interest of erring on the positive side, I consistently used the adjusted or consolidated figures. And I took the liberty of producing two sets of calculations, one in which I included only those companies providing EBITDA figures of their own, and a second in which I supplied my own back-of-the-envelope EBITDA estimates to fill in the holes.

The five companies that supplied their own first-quarter EBITDA figures generated $3.63 billion of EBITDA in the first quarter. That was up 1.4 percent from $3.58 billion in the year-earlier period. However, using my back-of-the-envelope estimates, first-quarter EBITDA for all 10 companies rose 21.8 percent to $5.5 billion, which in turn suggested a substantial EBITDA margin of 23.9 percent in the first quarter.

Seven companies disclosed figures that work as estimates for last-12-months EBITDA, as well as figures that work as estimates for 2006 EBITDA. Those seven saw EBITDA over that period rise 11.0 percent to $17.3 billion. Among the top performers, telecom company Alltel Corp. scored a 12.3 percent gain in annual EBITDA over that period, to $3.1 billion. At the other end of the spectrum, Energy Future Holdings Corp. saw a drop of 13.3 percent, to $4.9 billion. Throwing in my back-of-the-envelop estimates produced a 7.9 percent rise in EBITDA for the 10 companies over the same period, to $21.9 billion.

Figuring out how well these companies are doing at servicing their debt quickly gets me out of my comfort zone. For what it’s worth, I calculated trailing-12-month EBITDA-to-interest-payment ratios for all 10 companies, incorporating my back-of-the-envelope EBITDA estimates. To generate an estimate for full-year interest payments I multiplied first-quarter interest payments by four. Doing so produces a set of EBITDA-to-interest-payment ratios that range from 0.5 to 3.7; the median is 1.5 and the average 1.8. In other words, these companies have been generating close to twice the EBITDA they need to cover their estimated interest payments, which means plenty of cash left over to pay down principal or to deploy in other ways.

The 10 companies remain heavily leveraged, with an estimated median long term debt-to-LTM EBITDA ratio of 7.7. Kinder Morgan Energy Partners, at a 5.0 ratio, is the least heavily leveraged of the bunch by my estimates.

Fireworks are few in the valuation data. Most of these deals being relatively new, the first-quarter valuations I found remain fairly consistent with the cost of the investments. Standouts include HCA Inc., the hospital management company, which KKR has written up by 19.1 percent; Harrahs Entertainment, the casino and hotel operator that Apollo has written up by 8.4 percent; and Kinder Morgan Energy Partners, whose shares are trading up about 6.5 percent since the acquisition.