Buyout hunger

The global boom in mergers and acquisitions swept through the Philadelphia region in the first half of 2007.

The value of deals involving Philadelphia-area companies surged to $31.5 billion, including debt, up 52 percent from $20.61 billion for the first six months of 2006, according to Thomson Financial.

Those totals are based on 78 deals with announced values this year and 76 deals with announced values last year. The percentage gain is on par with the 53 percent increase Thomson tracked globally.

The value of the biggest deal so far this year - $8.72 billion for Penn National Gaming Inc. - was about $500 million more than the $8.2 billion deal for Aramark Corp., which topped the chart a year ago.

On most deals, the price tag is private, making it impossible to know the true value of the region's 252 deals announced Jan. 1 through June 30 - most involving small, private companies tucked away in industrial parks and office buildings.

What's clear, however, is that times are good for lawyers, bankers and others involved in buying and selling companies.

"We're all really busy," said Kate Shay, a partner at Duane Morris L.L.P., who regularly represents companies in mergers and acquisitions.

Trillions of dollars sloshing around in global capital markets - both equity that can be used to buy ownership stakes, and relatively low-cost debt - are making the fast times possible.

Standard & Poor's said last week that the volume of high-yield bonds - the rough equivalent of subprime mortgages for the corporate debt market - skyrocketed in the first five months of 2007 to $446 billion. That is already 72 percent of the total for 2006.

Some deals have "eye-popping" levels of debt relative to the amount of cash generated, Standard & Poor's said.

Other deals include highly speculative forms of debt. For example, last week's $631 million private-equity investment in Philadelphia's SMG, an arena-management company, included payment-in-kind notes, which pay interest in the form of additional notes.

In addition, new sources of money for leveraged buyouts have emerged, including hedge funds as lenders to private-equity firms, and other nonbank financing services.

Is the leveraged-buyout industry expanding like so many financial bubbles before it?

"That's certainly possible," said Steven Elek III, a partner in PricewaterhouseCoopers L.L.P's transaction-services practice in Philadelphia and leader of the health-care practice nationally. "We're seeing an environment with liquidity levels that we've never seen before."

Brian Doerner, a partner at Ballard Spahr, said he expected a slowdown in the cyclical mergers-and-acquisitions industry, likely because of a combination of higher interest rates and a stock market downturn. But he does not expect a meltdown.

"I don't see it bursting the way the dot-com bubble burst," said Doerner, who was involved in the $1.29 billion sale in March of InfraSource Services Inc., of Media, to Quanta Services Inc., of Houston.

The amount investors are willing to pay is growing, but that does not mean buyers are getting sloppy, Doerner said. "I'm seeing the private-equity funds do more and more due diligence."

While so much attention has been going to privateequity firms as buyers, it is easy to forget that privateequity firms are sellers as well. And it is a good time to be selling.

"We've exited seven businesses in the last two years at very strong valuations," said Christopher G. Hanssens, managing partner at Eureka Growth Capital L.L.C., of Philadelphia.

Kevin Coleman, director of corporate development at Ametek Inc., a Paoli manufacturer of electronic instruments, said he had noticed private-equity firms' playing a bigger role as sellers.

"Maybe up to half of the businesses we see are coming from private-equity firms," he said.

Ametek was among the most active purchasers in the region during the first half of 2007 with four deals, and on Monday, the company said it had increased its revolving credit to $450 million from $300 million to support plans to grow through acquisitions.

Other large, active buyers were privately held Bentley Systems Inc., of Exton, and SunGard Data Systems Inc., of Wayne, both of which matched Ametek's four acquisitions. In 2005, a coalition of private-equity firms bought SunGard itself in a $10.84 billion deal - likely the largest ever in the Philadelphia region - giving it a respite from Wall Street.

Owners of private companies are increasingly selling stakes of their companies to private-equity groups as a way to raise money for acquisitions.

In June 2006, New Century Transportation Inc., a privately held trucking company in Westampton, sold a substantial stake to Jefferies Capital Partners, a New York private-equity firm.

"Within the year, we've made two acquisitions," said Brian Fitzpatrick, New Century's chief financial officer. The latest was the purchase last week of P&P Transport, of Pennsauken.