Barbarians back at the gate: the return of mega LBOs?

Data InsightDealspeak 29 June

Barbarians back at the gate: the return of mega LBOs?

The leveraged buyout of Medline Industries in early June was the biggest since 2007.  

Private equity groups Blackstone, Carlyle and Hellman & Friedman paid a reported USD 30bn – or USD 34bn including debt – for the medical equipment supplier. Dealmakers now wonder whether the era of the mega LBO is coming back.  

Year-to-date, such debt-fueled deals are at historically high levels in the US: 1Q2021’s deal count of 542 set a record and 2Q2021’s deal value of USD 172bn was the highest since 2Q2007’s USD 178bn.

But LBOs have tended to be smaller – until now. During the gangbuster years of 2006 and 2007, a staggering 14 mega LBOs valued at USD 10bn or more took place. Since the global financial crisis of 2007-2009, only 15 mega LBOs have happened. Two of those happened this year: Medline’s buyout and Thoma Bravo’s USD 12.3bn acquisition of cybersecurity company Proofpoint [NASDAQ: PFPT].

The growing equity check

Several factors are fueling the LBO resurgence. Private equity funds, sitting on mountains of dry powder, are under pressure to pursue aggressive returns and aggressive deals in a low-interest rate environment. The specter of rising inflation has created a sense of urgency to deploy the capital now. Cheap financing further supports motivated buyers to aim for even bigger assets.  

One difference from the LBO heyday is that equity checks are now bigger. Medline’s buyer group offered equity of USD 18bn – more than half total deal value. For Proofpoint, Thoma Bravo wrote its largest equity check ever, contributing USD 8bn in equity or roughly 65% of deal value. It shows how competitive the market currently is, where quality assets are limited and deal-savvy buyers need to step up with sweeter offers.

An eye on who’s next

Several PE houses have closed massive funds this quarter and will look to deploy that capital, including KKR (USD 18.5bn), TA Associates (USD 12.5bn) and Bain Capital (USD 11.8bn).  

Medline’s unsuccessful bidders may also look for another big LBO opportunity. They included real estate investor Brookfield Asset Management, a consortium led by CVC Capital Partners, Bain Capital and Advent International, and some sovereign wealth funds who wanted to finance the equity component.  

Possible LBO targets include Bausch Health's [NASDAQ:BHC] eye-care unit, which it is looking to either spin off or sell and has reportedly attracted private equity bidders. Another potential LBO candidate is Medallia [NYSE: MDLA], a USD 5bn software company running a sale process and drawing interest from Vista Equity Partners and Thoma Bravo. The barbarians are back at the gate.

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