Corporate Finance : Deals Still Getting Done, But They Are Smaller


The global credit crunch appears to be having a major impact on the size and financing of takeovers, where cash deals for much smaller targets are increasingly the rule.

The biggest announced M&A; transaction worldwide in August was a bid by Germany-based Henkel to acquire the adhesives and electronic materials businesses of National Starch & Chemical of the United States, which is a unit of Imperial Chemical Industries (ICI) of the United Kingdom, for $5.5 billion, according to Thomson Financial. The Henkel transaction is contingent upon the completion of the acquisition of ICI by Netherlands-based Akzo Nobel, a manufacturer of chemicals and textile products, in a transaction announced in June that was valued at $14.8 billion.

In early September HSBC Holdings of the United Kingdom announced that it agreed to acquire a majority shareholding in Korea Exchange Bank (KEB), the sixth-largest bank in South Korea, for $6.3 billion, payable in cash, assuming the acquisition is completed on or before January 31, 2008. In the event the acquisition is completed after that date, the purchase price will increase by $133 million, also payable in cash.

HSBC will acquire a 51% stake in KEB from LSF-KEB Holdings, a Belgium-incorporated holding company controlled by Lone Star Fund IV, part of a family of funds run by a US-based private equity group. Under a shareholders’ agreement with Lone Star, the Export-Import Bank of Korea is entitled to require HSBC Asia to purchase part or all of its 6.25% stake in KEB on substantially the same terms.

Under the acquisition agreement, HSBC Asia has the right to conduct further due diligence on KEB in a period of 40 days following signing of the agreement, which may be extended by a further seven days in certain circumstances. HSBC Asia is then entitled, within five days of the end of that period, to notify Lone Star that it does not wish to proceed with the acquisition, in which case the acquisition agreement will terminate.

The Henkel and HSBC transactions were much smaller than the biggest deals announced in July, which included an $18.8 billion bid by Delta Two, an investment company based in Qatar, for UK-based food retailer J Sainsbury, and a $16.9 billion bid by Groupe Danone of France for Dutch specialized food producer Koninklijke Numico, according to rank values computed by Thomson Financial.

At the end of August there were about $535 billion of financial-sponsor, or private-equity-type, buyouts pending worldwide, representing deals that have been announced but that have not yet settled, according to Dealogic. Some 88% of the pending volume is from deals announced in 2007. The longest outstanding major financial-sponsor deal, announced on October 2, 2006, is a $27.4 billion bid for Harrah’s Entertainment by Apollo Advisors and TPG Capital, formerly Texas Pacific Group.

North American-based pending financial-sponsor M&A; buyouts represent 85% of the total pending volume worldwide, according to Dealogic. For deals over $1 billion, TPG Capital had six deals pending valued at $113.2 billion, followed by Goldman Sachs Capital Partners with $84 billion pending from five deals and Kohlberg Kravis Roberts (KKR) with $79.5 billion from three pending buyouts.

Dealogic calculates the potential revenue to investment banks from global pending financial-sponsor M&A; buyouts to be $2.8 billion. The 10 pending buyouts that are bigger than $10 billion each have an average acquirer-side termination fee of $655 million.

Gordon Platt