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Bonfire of Buyouts Accelerating, Preparing Default Explosion in Credit Markets

Dec. 19, 2006 (EIRNS)—The fourth-quarter explosion of so-called "leveraged buyouts" worldwide, is accelerating wildly in the final weeks of the year, marked again on Dec. 18 by the announcement of $87 billion "worth" of such buyouts, the fourth day in three months in which at least $75 billion in leveraged takeovers was made public. The Dec. 18 buyout splurge involved $57 billion in new debt loaded upon the takeover target companies, two of the biggest of which were immediately downgraded from investment-grade to junk-debt status in the process. And the $87 billion does not include the $30 billion merger, also Dec. 18, of Statoil and Hydro, two oil companies substantially controlled by the Norwegian government.

The wild acceleration of takeovers has lifted the record totals to 33,000 buyouts "worth" $3.6 trillion in 2006. Over $1 trillion will be in pure predatory takeovers by "buyout firms"--private equity and hedge fund locusts--as opposed to mergers between two companies in an economic sector. But even in the cases of mergers or buyouts of one operating company by another, the takeover costs are usually being paid in cash--not stock as in the 1999 merger boom--and the cash is coming from terrific amounts of new debt, borrowed from banks, hedge funds, etc. on the basis of "leverage," another name for the promise of looting and destruction of the companies and their workforces. "Lenders are increasingly willing to arrange aggressive financing packages for corporate clients," is how the Financial Times characterized the debt-default bonfire being stoked up.

Moreover, private equity fund predators are reported to have $200 billion more to put into mergers in the final two weeks of the year; with bank lending multiples typically four to one, that would put another $1 trillion in takeover cash in play, and could push the year's total to $4.5 trillion, more than 30% above the previous record in 1999.

Some examples this week:

  • Express Scripts' hostile takeover of Caremark Rx--a merger of two of the biggest "pharmacy benefit managers" of the HMO jungle--involves $14 billion in new debt, which is nine times the annual earnings of the combined target company. Caremark Rx debt was quickly downgraded to junk as a result.

  • Qantas Airways takeover by the pirates of Macquarie and Texas Pacific Equity Fund involves $9 billion in new debt, 15 times Qantas' earnings; the Australian government warned Dec. 18 that Qantas' debt will be junk-rated and the government will not bail it out in future. There is a desperation attempt by Qantas' pilots' union to buy enough shares to stop the takeover.

  • Apollo Management Group's (private equity fund) takeover of Realogy Corp.--which owns Century 21 and Coldwell Banker real estate companies--involves $7 billion in new borrowings from JP Morgan Chase and Credit Suisse. Realogy's debt was immediately downgraded to junk on Dec. 19, and the cost of insuring its debt against default leaped up, from 0.6% to 3% of the debt.

  • USAir's attempted takeover of Delta will leave Delta with an immense $23 billion in debt, as opposed to the $10 billion debt it would have otherwise. This $13 billion in new debt is more than 25 times earnings when last Delta had any earnings, in 2003. According to Delta's reorganization bankruptcy filing Dec. 19, the takeover would lose 10,000 jobs, 180 aircraft, and a 10% shrinkage of the combined airline. And absurdly, $6 billion of the new debt is to be floated to {pay off unsecured Delta debt} which is now frozen in bankruptcy.

  • The Harrah's casino takeover by private equity firms Apollo Management and Texas Pacific involves $10.7 billion in new debt, or 13 times the target's earnings.

  • The Freeport McMoRan Mining takeover of Phelps Dodge loads $15 billion in debt on the combination of two corporations which had no net debt, and produces a combined junk-rated company from two companies whose bonds were AA-rated. Rumors were swirling at the same time of leveraged takeovers of Home Depot, Ladbrokes, Tribune Publishing, and many others.

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