Private equity gobbles up Alltel, but not everyone is celebrating

by Lee Simmons, May 25th, 2007, 7:00 am

Recently I wrote about how private equity is eyeing the ever-consolidating record label business. Well, the same can be said for telecoms. TPG and Goldman Sachs unit GS Capital will pony up $27.5 billion to acquire Alltel in the largest-ever buyout of a US wireless firm. The deal comes on the heels of Cerberus’ $7.4 billion offer to purchase Chrysler and signals an upward trend in leveraged buyouts (already totaling nearly $400 billion this year).

Why is private equity suddenly so hot on the acquisition trail? One need look no further than debt financing markets, which support enormous amounts of cheap debt for purchases such as this. In the Alltel deal, Goldman Sachs, Citigroup, Barclays, and RBS will provide acquisition financing. Goldman Sachs, Citigroup, and Morgan Stanley are financing the Cerberus-Chrysler deal. (Other major LBO targets presently include TXU, Dollar General, and Bausch & Lomb.)

All the activity certainly looks good for the US economy. Stockholders are happy with the record highs, but not everyone is thrilled. Bond investors are fed up with how private equity takes advantage of creative financing that essentially strips lenders of most of their rights in the event that buyers cannot make their debt payments. Fed chief Ben Bernanke has also voiced caution over the “significant risks” for banks, and he recently warned that the LBO rally could lead to a major US debt crisis.

Jeffrey Bronchick, a money manager at Reed Conner & Birdwell, puts the debate into perspective in a recent LA Times piece: What future returns do stockholders give up by selling out today? Private equity is interested in acquiring a company for the lowest price possible, Bronchick says, to make out like bandits a few months or years down the line. The potential problem, the piece goes on to say, is that private equity acquires the upside — or, what stockholders “might have earned if the company had remained public and prospered.”

For now, concerns aren’t cooling a hot private-equity market. Time will tell if buyers are throwing caution to the wind.