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— Capital Calls —
Reflect for a moment on Alltel Corp., the wireless carrier that Verizon Wireless agreed to buy from TPG Capital and Goldman Sachs Capital Partners on June 5. Thanks to their lenders (including GS Capital Partners' parent), the banks virtually handed the sponsors profits at three stages along the way. The sponsors signed their original $27.5 billion buyout with Alltel in May 2007, when the living was easy. They had to stump up just $4.54 billion of equity, or 16.5% of the deal value, and the debt package included payment-in-kind toggle loans, allowing the buyers to pay interest with more debt if they saw fit, and various no-strings-attached facilities.
Meanwhile, Alltel performed handsomely for its new owners. Revenue
and Ebitda soared. The company added $200 million of cash to its
balance sheet between the closing and March 31 and repaid some debt.
But TPG founders David Bonderman and James Coulter wanted to get their hands on some of the $300 billion of unwanted buyout debt. Blackstone Group LP and Apollo Management LP also hoped to take advantage of the banks' misfortune by buying debt from them. This spring, TPG, Blackstone and Apollo bought $3 billion of Citi debt, including Alltel debt, at less than 85% of face value. The banks also provided 75% financing. Having bought the company, TPG would now earn a kicker making a leveraged investment in its debt. Take a 10% loan at a 15% discount and leverage it by 3 times. Or leverage the gain if the debt rebounds on the secondary market. The close-out sale of the debt made sense for the banks, because they replaced risky leveraged buyout debt with loans that would be impaired only if the value of the collateral (the debt) fell a further 25%. That allowed them to free up regulatory capital so they could make new loans. But wait! The banks were about to do TPG one more favor. When Verizon Wireless caught wind that the banks wanted to sell some of Alltel's debt cheaply, it sensed an opportunity to grab Alltel and its complementary geographic cell network -- an asset Verizon would have bought last year had it not been outbid by buyout firms. The banks jumped at the chance to sell Verizon $5 billion of the LBO bridge loans at a $220 million discount. Ka-ching. That money flowed straight into the pockets of TPG and GS Capital Partners. It reduced Alltel's total debt, thereby boosting the value of the equity by a similar amount. Meanwhile, the growth in Alltel's revenue, customer base and Ebitda justified Verizon's paying a small premium over last year's price ($28.1 billion versus $27.5 billion). Add it all up -- the $220 million, the premium and a $600 million projected gain in Alltel's cash position by the time of closing -- and TPG and GS Capital Partners are poised to walk away with a $1.3 billion, or 28%, profit on their investment when the Alltel deal closes, likely late this year. The banks go away happy because they trade unmarketable debt in a highly leveraged company for debt backed by Verizon Wireless, and some of the debt, which they had written down, will now have to be taken out at par. Bingo! They will now be able to book a gain on that. Goldman comes out even better. In a feat worthy of Milo Minderbinder, the quartermaster in "Catch-22" who made money buying eggs at 7 cents apiece in Malta and selling them for 5 cents each at a U.S. airbase in Italy, the bank itself made money even while it was losing it. It took a bath on the debt but will make much of that back when the debt is rerated after the buyout. Moreover, its mezzanine debt fund took up $810 million of a $1 billion Alltel PIK toggle bond issue in December, which replaced a portion of the bridge loans. Goldman's fund bought at 91 and will now be taken out at 101. That's on top of GS Capital Partners' profit as an equity investor. Sometimes it pays to wear more than one hat. |
What a great business private equity is! No matter what the markets do, the banks will make sure you earn a buck.
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