Mega deals: Some giant boom-era leveraged buyouts, including that of LA Times publisher Tribune, have wiped out investors. But others on the top 20 list have scraped through the crisis.
Investors in HCA now appear well in the money on paper. Woes at Freescale Semiconductor and even Clear Channel are waning. But private equity bosses still have plenty of work to do -- not least to prove to investors that mega-funds and mega-buyouts can deliver decent returns.
That's an uphill struggle. In today's post-crisis world, only 6 percent of private equity fund investors think mega-buyouts present the best opportunity for the industry, according to a recent survey by Preqin.
Some improving situations may help restore the mega-buyout's credibility. HCA, the U.S. hospital group, looks like it could end up being lucrative for private equity owners Bain Capital, Kohlberg Kravis Roberts and Bank of America Merrill Lynch. The company's EBITDA increased 20 percent to $5.5 billion last year over 2008.
It also just raised debt to pay investors a whopping $1.75 billion dividend. Despite that, HCA's debt-to-EBITDA ratio will be five times, much less than the 6.4 times at its LBO in late 2006. And with EBITDA growing, the company could now be worth more on paper than the $32 billion for which it was bought.
Freescale's fortunes have changed too. In late 2008, some of the chip maker's investors had written down their holdings by as much as 50 percent. But EBITDA in the fourth quarter last year was nearly 10 times higher than in the same period a year earlier. Freescale has cut more than $2 billion of its debt in the past year or so, and is in the process of restructuring more debt.
Even beleaguered Clear Channel can breathe more easily these days -- though its progress may only just keep it solvent. The radio and advertising group's secured debt-to-EBITDA ratio jumped to nearly nine times in the third quarter last year because operating income declined sharply. But the company recently completed a bond offering for its outdoor advertising subsidiary that will pay off $2 billion of debt, and advertising looks to be turning up this year.
Still, turning paper profits into hard cash will be a challenge even for companies like HCA that may soon be ready to go public, giving investors the chance to sell out. Buyout fund managers need enough giant LBOs to go well to outweigh the ones that didn't make it. Some near-shipwrecks have been avoided -- but there's plenty of rough water ahead before the buyout barons can cash in their treasure.