The tightening of the credit markets and fears of a global liquidity crunch have turned a normal summer slowdown in mergers and acquisitions into a deep freeze.
Fears that deals may fall apart or their prices may go down escalated this week after home-improvement retailer Home Depot Inc. said the sale of its wholesale business might bring less than the agreed-upon $10.3 billion.
Analysts and traders said the Home Depot situation might be more related to the decline in the supply business amid the housing slump rather than a symbol of a bad merger market. Still, that news could spook an already skittish market.
Home Depot put fear in people, for sure, but it's a company-specific and industry-specific situation, said a trader who requested anonymity. You aren't going to see that happen with TXU or other large, solid companies.
Fortis' Chief Executive Jean-Paul Votron dismissed new concerns on Friday over the Belgian-Dutch bank's capacity to fund its part of a 71 billion euro takeover of Dutch rival ABN AMRO.
We are very comfortable about our financing, Votron told reporters in Edinburgh. We have always been comfortable about the financing, and there's no reason why we should not be today.
But financing for other deals has run into trouble.
The banks providing funding for the buyout of Britain's Alliance Boots put syndication of 1 billion pounds of second-lien debt on hold due to credit market turmoil, sources familiar with the situation said last week.
And on Tuesday, British cable operator Virgin Media postponed the sale of the company after it became apparent buyers would not have access to the debt needed to do a deal right away.
Virgin Media marked latest victim of the $400 billion backlog of debt financing that banks are struggling to sell to investors, making it tougher for borrowers to secure funds for new takeovers, especially larger ones.
HEALTHY, BUT PAINFUL
Given the current climate, the mere fact of 'bigness' of a particular proposed transaction will give people pause, said Anthony Sabino, a New York lawyer and professor of law and business at St. John's University Sabino. Now there's going to be a psychological resistance to folks financing the deal.
Shares of companies such as First Data Corp and Tribune Co. have slumped below the price of their takeover offers as investors fear the deals may get renegotiated or fall apart altogether, analysts said.
Investors have been concerned about the pricing and structure of the $26 billion First Data takeover, since the debt to fund it will probably be priced immediately after the September 3 Labor Day holiday, market sources said.
The part of the debt market that has been most significantly impacted are the covenant-light, very high credit ratio-type leveraged loans that private equity companies were relying on for their LBOs, said Ed Guay, partner at energy investment bank Tudor Pickering. I think that marketplace continues to face some issues.
Earlier this month, Britain's Cadbury Schweppes said it had to extend the timetable for the sale of its North American beverage business because of the turbulence in debt markets.
Cadbury said it preferred to sell the unit, which could fetch up to $15.5 billion, but would spin it off if the debt markets remained volatile.
Private equity firm CVC Capital had eyeing Altadis after the Franco-Spanish tobacco company accepted a bid from Imperial Tobacco, but sources have said problems in the debt market now make a counter-offer less likely.
Not everyone sees the slowdown in deals as a bad thing, however.
This is a much-needed correction and pulling to the side of the road and letting the car radiator cool off, Sabino said.
Certainly for the immediate future, there'll be a pullback -- and there should be, he added. There will be a reworking of terms -- there should be. When it comes to borrowing money to finance these deals, there will be an abrupt halt to that, and that's a good result as well.
(Additional reporting Megan Davies in New York, Doris Frankel in Chicago, and Anna Driver in Houston)