The $80 Billion Buyout

A popular press sport right now is to identify public companies that could be snatched up by leveraged buyout firms. Lots of attention being paid to perceived under-valuations, P/E ratios, lender proclivities, etc. But rather than providing a list of companies that could receive bids, let’s approach it from a different angle: How many U.S.-listed companies are certain to not generate LBO attention?

This might seem like an infinitely-ended question, but there is a hard numerical answer: 61. The common denominator is that each company either has a market cap of at least $80 billion, or is valued at more than $80 billion once existing liabilities are included.

Did I just settle on $80 billion because it is a round number that can be used for soundbite purposes? Ummm… kind of, but there really is some legitimate math behind it (but no calculus, because I slept through it).

Let’s hypothesize that five firms –Blackstone, Carlyle, KKR, Permira and TPG – would be comfortable making $2 billion equity commitments (assuming a bit of LP syndication). Then add in Apollo Management, Bain Capital and Thomas H. Lee Partners at around $1 billion each. If all of these firms were to participate in the same deal, you'd have $13 billion in equity. Such cooperation is unlikely, but I’m assuming that Warburg Pincusand/or some other firm would help pick up the slack (like Goldman and Providence Equity did when Carlyle and TH Lee dropped out of SunGard).

Now onto leverage. S&P reports that the average equity contribution for a $1 billion-plus LBO last year was 30% of the whole transaction structure. Just using this figure, the LBO ceiling would be around $43.33 billion. But let’s use the more aggressive model of HCA, where private equity firms are contributing just around $5.4 billion of the $33 billion (16.4%). By doing so, our $13 billion equity contribution translates into $79.3 billion, which we’ll round up to $80 billion for ease of use. The 49 U.S.-listed companies with $80 billion or more in market cap are therefore on the "Can Not Buy" list. 

But we are not done, because we have not yet accounted for assumed debt. S&P includes assumed debt in its equity-to-debt ratio, as did I in the HCA example. Unfortunately, market caps don’t. HCA, for example, has a market cap of just around $20.1 billion, not $33 billion. So we need to add any companies whose sub-$80 billion market caps are buttressed by enough existing liabilities to push their proposed LBO figures up over $80 billion. There are 12 of these, thus giving us a total of 61 companies safe from LBO takeover (for now).

So Microsoft, GE, and 58 others can rest easily tonight. The rest might want to retain a banker.