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Beckman at 8.6 Times Ebitda Leaves LBO Crowd Frigid: Real M&A

Feb. 9 (Bloomberg) -- If Danaher Corp.'s $7 billion deal for Beckman Coulter Inc. at a price that would have had the leveraged buyout crowd salivating four years ago reveals anything, it's that private equity firms haven't recovered from a takeover spree that still has investors waiting for returns.

Danaher agreed this week to buy Beckman for $83.50 a share, valuing the diagnostic-equipment maker's equity and net debt at 8.6 times earnings before interest, taxes, depreciation and amortization in the cheapest deal on record for a medical- instruments maker, according to data compiled by Bloomberg. Washington-based Danaher's bid beat a group that included Blackstone Group LP, while Carlyle Group dropped out early, said people with knowledge of the sale who declined to be identified because the auction was private.

While borrowing costs for LBOs in the U.S. have fallen to the lowest since August 2008, private equity firms have become less willing to pay up for some deals after getting saddled with debt-fueled acquisitions made as credit markets began to freeze. After the funds lost 18 percent in 2009 in the worst performance in at least a decade, Blackstone President Tony James called the industry "lazy" and "unresponsive" to investors. The firms returned less than the Standard & Poor's 500 Index last year.

"It's a new normal for private equity because money is not chasing deals recklessly," said Dan Veru, chief investment officer at Palisade Capital Management LLC in Fort Lee, New Jersey, which oversees $3.5 billion. "They overpaid for assets. The returns weren't there. They did learn a lesson."

Relative Value

The takeover by Danaher, which makes microscopes and water- treatment systems, values Brea, California-based Beckman at about 8.6 times its Ebitda of $812.4 million in the most recently reported 12-month period, according to data compiled by Bloomberg. No deal in the medical-instruments industry of at least $1 billion has ever been done at less than 10 times.

Offers for Beckman came in on Feb. 2, people familiar with the matter said. Besides Danaher, the bids included a combined offer from Carlyle and New York-based Apollo Global Management LLC and another from Blackstone and TPG Capital of Fort Worth, Texas, said the people.

Initially, all the bids were in the mid-to-high $70s, the people said. Another round of offers was solicited over the weekend, pushing the price higher, they said. The Carlyle-Apollo group dropped out early, said two of the people, while the Blackstone-TPG bid fell short of Danaher's $83.50 offer. Another strategic bidder also lost out to Danaher, they said.

'That Sting'

"It definitely has to do with the sting of overpaying for assets near the peak of the market," said Hank Smith, chief investment officer at Haverford Trust Co., which manages about $7 billion in Radnor, Pennsylvania, and owns Beckman. "That sting takes a while to heal. You certainly hope that they have gotten more disciplined and that discipline will last."

Matthew McGrew, a spokesman for Danaher, declined to comment, as did Beckman's Mary Luthy. Representatives from Carlyle, Apollo and Blackstone also declined to comment.

A record $1.6 trillion in leveraged buyouts were completed from 2005 to 2007, according to Preqin Ltd., a London-based research firm. Some of the biggest deals are still underwater.

Energy Future Holdings Corp., taken private in a record- setting $43.2 billion LBO led by New York-based KKR & Co. and TPG in 2007, is valued at about 20 cents on the dollar, according to the firms.

TXU, First Data

The private-equity owners agreed to hold the biggest power producer in Texas, formerly known as TXU Corp., for at least five years to assuage fears about them flipping the company. Energy Future has extended maturities of its debt, which totals more than $40 billion, according to Bloomberg data.

First Data Corp., the Atlanta-based company acquired by KKR in 2007, is valued at 40 percent below cost as of September, according to firm's public filings.

Private equity firms lost an average of 18 percent in 2009, based on a one-year rate of return, according to data compiled by researcher Pitchbook Data Inc. That's the biggest loss since at least 2000. Returns bounced back to 12 percent last year, less than the peak return of 21 percent in 2006, the data show.

Buyout firms typically pool funds from investors with a 10- year life span, returning profits as they realize gains over the life of the fund. Profits have been slower to materialize since the credit crisis. Firms were forced to hold onto their investments for an average of 4.9 years in 2010, more than a year longer than in 2006, according to Pitchbook Data.


"We as an industry were lazy," Blackstone's James said in an interview last year. "We were unresponsive to our investors. That world is gone."

Private equity firms are exiting some of their biggest leveraged buyouts by taking the companies public this year.

Kinder Morgan Inc. of Houston, which was the second-largest U.S. LBO on record when the $27.5 billion deal was announced in May 2006, may hand Washington-based Carlyle a profit of almost three times its initial investment of $882 million through its $2.3 billion public offering tomorrow, data compiled by Bloomberg show.

LBO firms are also raising loans in the U.S. at the lowest costs in 2 1/2 years, foreshadowing a possible surge in bigger leveraged buyouts. Interest rates on new loans have dropped for six straight months to 4.32 percentage points more than benchmarks, the lowest since August 2008, from their peak of about 5.83 percent, according to Standard & Poor's Leveraged Commentary and Data. The decline represents annual interest savings of about $15 million for every $1 billion borrowed.

'We're Pretty Sure'

While Blackstone's James said last year that his firm is more comfortable with acquisitions worth less than $5 billion, chief executive officer Stephen Schwarzman is now looking to do bigger deals.

"We believe LBO transactions requiring $5 billion or more of financing can be executed on attractive terms," Schwarzman said Feb. 3 in a conference call with analysts and investors. "In fact, we're pretty sure it's higher."

The co-founder of New York-based Blackstone, the world's biggest private equity firm, put the figure at as much as $10 billion during a Jan. 27 interview on Bloomberg Television.

Elsewhere in mergers and acquisitions, Louisville, Kentucky-based Kindred Healthcare Inc. agreed yesterday to buy RehabCare Group Inc. for about $877 million in cash and stock, creating the largest U.S. provider of rehabilitation services.

Including net debt, the deal represents a premium of 40 percent over St. Louis-based RehabCare's 20-day trading average, according to Bloomberg data.

Premier Foods Plc agreed to sell its canned-food business, including the brands Crosse & Blackwell and Smedley's, to Tokyo- based Mitsubishi Corp.'s Princes unit for 182 million pounds ($292 million). St. Albans, England-based Premier announced the sale to Mitsubishi yesterday in a statement.

There have been 2,525 deals announced globally this year, totaling $212.3 billion, a 21 percent increase from the $175 billion in the same period in 2010, according to data compiled by Bloomberg.…

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