The Terminator
Like a bad Arnold Schwarzenegger movie, the LBO crowd is right back in the game with another very large takeover, this time Hilton Hotels by Blackstone. The total purchase including the balance sheet and debt looks to be about $29 billion. Typifying just how loonie these transactions have become, HLT has operating income of about $1.2 billion, or a mere 4.1% of the take out price. Assuming $25 billion in debt, that would place debt service at about $2 billion a year. Blackstone plans no divestitures, so the math is straightforward, and the presumption is as well, just borrow the balance. This is definitely the Terminator roulette school of business economics, with now alarming amounts of debt playing the same all or none formula.
More securities than ever have the lowest rankings, with CCC ratings assigned to 26.5 percent of the new debt, according to New York-based Fitch Ratings. That compares with 15 percent in 2006 for debt that Fitch says has a √¢‚Ǩ≈ìhigh default risk.’√¢‚Ǩ‚Ñ¢
The market has responded to this deal by immediately bidding up names like Starwood Hotels (HOT) as if a similar loonie transaction is in the works as well. The “logic” looks like this. Notice how the “analysis” incorporates EBIDA, which conveniently leaves out depreciation, an absurd concept to apply to high standards luxury hotels in particular. HOT is rather unleveraged, but an equivalent deal level would be around $21 billion adjusted for debt, which would be close to $85 a share. HOT is already trading at $75 this morning, which I feel ASSumes alot, and fears little. August 75 calls are trading at 3.50 with the stock at 74.70, which further assumes alot. HLT itself is trading a mere two points below the takeout price of $47.50, a very narrow arbitrage indeed. Get the picture?
Also despite Blackstone Group’s poor post IPO stock performance, another big LBO player, KKR is getting ready to supply stock to the market as well. So the LBO Boyz are in a double hit mode now, huge supplies of new debt, and new stock as well. Supply of stock will become even more evident when the lock out periods end. In the case of Blackstone that will be 120 days from the offering date, or late October.
Also typifying the current Terminator and rather crazed market was last night’s 5% cratering of the Shanghai market on stock supply worries, which was completely blown off elsewhere. Ironically we are today in a situation where various Riskloves, whether they are the Xiaos in China, or hedge funds holding mortgage securities are under real strain. The reaction (so far) from those still in the game is just more Wiley Coyote gambling and the very ASSumptive risk taking described with HOT and HLT above. The fact that other deals have been delayed, and condition terms worsening also seems to be overlooked. Remarkably, even boycotts of this debt by some of the biggest actors of all, is just pooh poohed.
TIAA-CREF, which oversees $414 billion in retirement funds for teachers and college professors, is boycotting some debt offerings used to finance LBOs. Fidelity International, a unit of the world’s largest mutual fund company, and Lehman Brothers Asset Management LLC, the money-management arm of the third- biggest bond underwriter, say they’re avoiding debt from buyouts.
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