Getty Images Deal

Interesting articles about the Getty Images buyout... heres one of them: http://blogs.wsj.com/deals/2008/02/25/thinking-ou….

I was just reading about this deal and was wondering what some of you thought about:

  • Hellman & Freeman using, for the most part foreign lenders to finance the deal. Is this something we may see more and more in PE buyouts because of the beating US banks have taken in the credit markets?

  • H&L invested $800 million equity in the buyout(10% of their fund, 33% of the buyout). Are lower leveraging levels becoming the norm with the state of the debt markets? Will PE funds begin to exhibit significant lower IRRs as a result?

What are some of your thoughts?

 

Good questions. I actually know personally a couple of the junior guys who worked on that deal.

One thing to keep in mind - the European banks in the bank group may be foreign at the parent level, but their credit committees are U.S. based and the decision tree remains in the U.S. So consider them exactly how you would consider getting financing committments from foreign owned banks with U.S. operations like UBS, CS, DB, etc. This is NOT akin to investments directly into PE funds like Carlyle and TPG from sovereign wealth. But yes, middle market and "non-traditional" lenders have become (and have been in the past several months) been a force in the market for term loans - replacing the major banks on Wall Street that have effectively put a freeze on all new underwriting while they wait for their backlog to dissipate (hopefully). I suspect you'll see non-traditionals like GE, CapitalSource, RBS, and CIT filling the void until the loans that have been written off by the major banks begin to realize and hopefully there is a write-up in value (or at least there is less overhang).

Yes, lower leverage levels are di-rigour for now and probably will be for the foreseeable future. Gone are the days of 7x, 8x, or 9x leverage, PIK toggles, and covenent-lite.It's nice to see Getty management rolled almost 200 million (quite impressive, actually). And yes, lower leverage is oftentimes a symptom of lower IRR's, but possible mitigants include firm partners providing potential operating efficiencies, the hope that the credit markets will allow for a global refi (and, this is a stretch here, dividend recap), and lower public benchmarks (while funds almost always have minimum IRR hurdles, the spread between the minimum and the expectation can fluctuate vs. public markets).

 
Best Response

Even before the credit crunch, Hellman & Friedman tended to be quite aggressive, even with tech deals... actually, especially with TMT-type stuff if you look at some of the multiples for deals done in recent years.

Even though this deal isn't huge or anything, it is one of the largest TMT buyouts I can recall since the credit crunch.

33% equity is not unusual; the days of 5% equity checks were over in the 80s after KKR/Nabisco etc. This deal was levered at around 4x EBITDA which is not particularly aggressive and much lower than the 7-9x deals GameTheory quoted above.

IRRs may go down a bit, but the selloff lately means that H&F is likely betting on some multiple expansion if they hold this for a lengthy period of time. Actually lots of companies are becoming targets due to low EBITDA multiples now with the stock market decline. The debt and companies not wanting to sell at this point in time remain issues though.

 

If the $800mm equity was 3x EBITDA and Leverage ratio 4x EBITDA... the purchase price comes out to a little over $2 billion. I know the purchase price was ~$2.1 bln + assumption of debt making it total value of the deal $2.4 bln.

How does the assumption of debt get factored into the multiples? It seems like we are not counting that in the purchase price multiple? Is this debt not being refinanced? Im a little confused about the assumption of debt in this deal as it relates to the purchase price.

Wouldn't H&L want to show a 4.5x purchase price... as opposed to a 4x so they could exit on a comparable multiple? Do they anticipate using a similar 'assumption of debt' on exit which would be more advantageous (ie. debt assumed by buyer on exit would be more than the .5x EBITDA multiple)?

 

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