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Saturday, September 22, 2007 1:27 PM

Buyout Bingo Reversal Continues

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PHH was among first of the LBO deals to collapse. The action was described in Buyout Bingo In Reverse. Yet another deal collapsed on Friday.

The Associate Press is reporting Equity Firms Back Out of Harmon Buyout.

Two private equity firms on Friday backed out of their $8 billion buyout of upscale audio equipment maker Harman International Industries Inc., marking the latest such deal to sour amid tightening global credit conditions.

Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc.'s private equity unit told the company they are under no obligation to complete the merger because "a material adverse change" in its business had occurred, Harman said in a statement.

Harman, whose audio equipment brands include Infinity, JBL and Harman Kardon, said it disagreed, but did not make clear what action, if any, it would take.

Investors punished the stock all day long as word dripped out that KKR and GS Capital Partners were attempting to nullify the deal. By the end of the day, Harman shares had plummeted by more than 24 percent.

While KKR on Friday had success in attracting investors to a $5 billion loan used for its acquisition of First Data Corp., the company originally planned to raise $14 billion but faced reluctance by Wall Street.

Cerberus Capital Management in July had to inject more equity into its takeover of Chrysler Group from Germany's Daimler. More recently, Home Depot lowered the sale price on its wholesale supply unit by 17 percent to complete its sale to private equity firms.

The Harman deal's collapse comes a day after SLM Corp., commonly known as Sallie Mae, issued a statement saying it expects the investors seeking to buy it for $25 billion to honor their commitments. The Sallie Mae deal includes a $900 million breakup fee compared with a $225 million termination fee in the Harman transaction.

The credit crisis caused four of Wall Street's top investment banks to report this week that they wrote-off some $4 billion of loans during the third quarter. In some cases, the banks weren't able to find funding for the loans -- or they plunged in value as investors retreated.

There also has been a number of reports that major investment and retail banks have approached private-equity firms about calling deals off. The banks have offered to pay the breakup fees to keep the large loans off their books.
Harman International Industries Inc. (HAR)

(click on any chart for a crisper image)

SLM Holding Corp.

FDC - First Data Corp.

Buyout Bingo Scorecard
  • PHH - Burnt Toast
  • HAR - Burnt Toast
  • SLM - Odds 50-50
  • FDC - Deal appears to be on
I suspect the SLM deal will fall through.
I doubt that FDC is a sure as the 100% that is priced in. I also suspect that if KKR goes ahead with FDC they are going to regret it down the line, even more so the people that provided the funding.

None of these deals made any real economic sense but the deals did pad the pockets of the underwriters like Citigroup (C), Merrill Lynch (MER), Goldman Sachs (GS), Lehman (LEH), etc, with lucrative fees at least up until now.

With buyout bingo in reverse, underwriters are paying breakup fees to keep the large loans off their books. As long as investors were willing to take on risk (buy junk at insane prices), the underwriters danced the tune.

It's telling that Citigroup, Goldman, etc, do not want the deals if they have to provide the funding themselves. Not only do they not want them, they are willing to pay breakup fees to get out of them. That should be enough to tell you who has been and remains the sucker in the deals that do go through: hedge funds and individual investors that buy into them. After all, if Goldman and Citigroup don't want the deals or the debt, why should you?

Mike Shedlock / Mish

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