The two latest leveraged buyouts to be crowned the largest in history have not just their hefty price tags or daunting amounts of debt in common. Both Kohlberg Kravis Roberts & Co. and Texas Pacific Group's $45 billion take-private of Texas utility TXU Corp., announced Monday, and Blackstone Group LP's $39 billion LBO of Equity Office Properties Trust, the most recent largest buyout in history until yesterday, have another common component: an equity bridge.
Today Dealbook discusses the risks involved in an equity bridge. Last December, The Deal's Vipal Monga broke down in even greater detail the challenges of such a financing when The Deal disected the Blackstone/EOP deal.
The vehicle calls for banks to coinvest equity with buyers and enables acquirers to go after a target with less cash up front. Blackstone used its bridge to avoid entering into a private equity bidding consortium, or "club deal," which are increasingly drawing fire and as one source says are falling out of fashion, according to Monga.
The vehicle, Monga notes, was also reportedly used in the $19 billion Freescale Semiconductor Inc. buyout by Blackstone, Carlyle Group, Permira and TPG. While they may become more popular as deals get bigger, they are much riskier than a standard bridge loan. He explains:
"In the latter case, the banks' investments are securitized and high up in the capital structure. An equity bridge by definition, however, sits at the bottom, leaving banks open to huge losses, without recourse, if something goes wrong in the time between committing the equity and its syndication."
Read Monga's entire synopsis, "Enter equity bridges," on TheDeal.com
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