LBO

After Zero Hedge earlier speculated that CAH may be subject to an LBO, the company appears to have taken matters into its own hands.

While it is our longstanding practice not to respond to market rumors and speculation, we are making an exception in this limited situation. Cardinal Health is not in discussions with any party regarding an acquisition of Cardinal Health. We do not expect to have further comment on this matter.

Zero Hedge: "forcing companies to make exceptions since 2010."

A quick glance at CAH CDS ceretainly seems to imply so...

File this one under the category of "creating TBTF Frankensteins" - Reuters has reported that as part of arranging rescue pre-petition financing for the broke state of California, Arnie is now in discussions for a $2 billion loan from Calpers which will help close the state's $19 billion budget deficit by about 8%. Of course, the balance would come from the FHA, or Goldman, both of which will see this as a lucrative mezz-IRR type toehold investment (with no downside, remember - there is no risk if you work for the government or are Goldman) in the world's 7th biggest economy. Of course, we jest about the latter. For now. What is truly ironic is that Calpers itself is in no danger of every being able to fund its own future pension obligations, which means this is merely a way to intertwine Calpers and the state of California, creating the most ridiculous TBTF public-private behemoth ever seen, which would mean that the collapse of either would be promptly preempted with more Federal taxpayer dollars. Well played, Ahhhnold, well played.

The fund expected to be LBOing $2.4 billion Burger King is heretofore completely unknown PE firm 3G (dyslexic readers note: not the previously rumored 3I). Who is 3G? Apparently it is a fund which according to Thomson One has less than a billion in total assets, the bulk of which, or 83%, is currently held by its CSX investment. This is because fund manager Alex Behring, a Brazilian, sits on the board of the railroad company since 2008, after 3G launched a failed proxy fight for the firm. So does the industrialist whose fund is much smaller than the hoped for acquisition have an expertise in retail? Why yes - according to the fund's latest 13F it has a whopping $56 million invested in Coke, $27 million in Lorillard, and a massive $3 million in Kraft. Burger King employees must be ecstatic, especially since the acquisition will likely be funded almost entirely with debt, meaning that the good ole' LBO model of sucking the equity marrow out of target companies, while paying hundreds of millions in interest expense is back to the forefront. Luckily, courtesy of JPM, the acquisition funding should not be a problem: we are confident the roughly 8x pro forma leveraged balance sheet will end up being rated AAA/Aa1 and pay about 5% interest, with no creditor protections whatsoever. To all those credit investors who wish to collect 2-3 coupon payments before the imminent default, we wish them all the best.

The day every sane investor has been waiting for is here - today marks the end of the Radioschack LBO rumors. After 3 years, 4 months, 50 days. 8 hours and 44 seconds (give or take) of hourly rumormongering that the increasingly irrelevant electronics retailer was supposed to be bought "any given day now" at a 10x+ EBITDA multiple by each and every PE firm in the universe, and with allegedly intelligent investors falling for it each and every time, it appears the end is here. Incidentally, according to preliminary calculations, a dedicated investor that would have done nothing but short RSH on every rumor spike would have returned about an 80% CAGR over the past 3 years. Couple this with selling RSH CDS and the ROI would have been the highest recorded in human history. From Reuters: "Blackstone Group and TPG Capital are unlikely to continue to pursue a possible bid for RadioShack Corp (RSH.N), two sources familiar with the situation said on Monday. Bain Capital had been interested earlier but is no longer in the auction, sources previously told Reuters." And with this, an entire section of rumor disseminators at the NY Post will suddenly find themselves praying Congress passes the unemployment extension bill later today.

BofA/ML's Jeffrey Rosenberg proves once again why he is one of the best credit analysts on Wall Street. Two months ago, the Bank of American put together a basket of potential LBO names which included Pactiv, Lexmark, Lubrizol, US Cellular, and Harris Corp, duly noted on Zero Hedge. He also proposed ways to play these names, focusing on various CDS strategies, of which by far the simplest one was to buy outright naked CDS on the names. Sure enough, this week Pactiv blew out, on rumors of an Apollo LBO (we hope for the sake of Pactiv's employees, not to mention Calpers, that the deal never materializes) and the names in the basket have widened by 121%-257% since inception. For those who followed Rosenberg's advice and made a 20x annualized return on the recommendation, congratulations. Sure enough, the trade is now closed. Additionally, after it was noted that a consortium of private equity firms was likely to acquire Fidelity Information Services, Rosenberg noted on May 7 that the deal is unlikely to materialize. Subsequent to his note, the deal has now fallen apart. This week, Rosenberg provides an updated LBO basket, as well as several strategies on how to play these, either outright or as pair trade. We are confident that with liquidity soon to become overabundant yet again, that these specific LBO names are set to see their credit spreads blow out as usual.

The Rating Outlook revision to Negative incorporates recent legal developments and ongoing regulatory challenges that could adversely impact Goldman's reputation and revenue generating capacity. Goldman's franchise and market position are potentially vulnerable to scrutiny by stakeholders, and like peers, may be affected by the industry's regulatory evolution.

With each day bringing new and more ridiculous M&A, and now LBO rumors, we thought it would be a good idea to highlight the public companies that have at least a fighting chance of going private. Using a simplistic template from UBS, we present the thirty companies which would generate the highest stock return should they get acquired, assuming a 4.5x Debt/EBITDA pro forma leverage (as much as TPG would like, 10x leverage is not coming back...Unless Joe Cassano is hired to run Chrysler's take private group), and also assuming a 40% equity portion in the transaction. In other words, these are the companies that at least on paper have the highest equity expansion potential in a 7.5x EV/EBITDA. While this analysis ignores whether or not any of these companies actually generate substantial cash flow to cover pro forma interest, or are a logical fit for any financial acquiror, any company not on this list is likely already equity heavy and as a result even if acquired will not result in material upside. As the chart below shows, the maximum stock upside ranges between over 200% in the case of R, to just over 22% in the case of BBY. This below list by no means suggests that any of these companies on it will be LBOed: it should merely be used a benchmark for modeling purposes.

Bernanke's ludicrous monetary policy has forced financial companies to relever to mid-2000 levels. A recent CLO has broken the 12 month quiet period in the structured finance universe, and finally made it all too clear that bankers and asset managers have no idea what to do with all the free extra money lying around, earning nothing on the short end of the curve. Furthermore, with rampant M&A rumors every day (of which 90% are patently false) private equity must be getting nervous. As we all know, with great free money comes great irresponsibility to do really dumb things, better known as LBOs. We analyze the imminent tidal wave of going private deals, which, if Bernanke keeps ZIRP for another year as is widely expected, is just around the corner, and that the record TXU LBO of 2007 will be promptly surpassed, in both size and idiocy. Oh well, if you can't beat them, join them. We present some of the most profitable ways to play the LBO wave of 2010, and no, it does not mean tracking down Moody's Deep Shah and buying stocks 24 hours ahead of the announcement, in expectation of a 20% pop.

After a mere $100 billion in projected debt maturities in the 2010-2011 period, the LBO wave of 2005-2007, largely financed with 5-7 year tenor bonds and loans, will set the refi scene on fire in the 2012-2014 period, when $700 billion of debt is set to mature. Should Fed Fund rates, and the yield curve begin to shift higher, the incremental cost of debt capital will destroy tens if not hundreds of billions of equity value over the next 5 years. After peaking at 19.4% in Q4, 2008, and subsequently dropping to 9.5%, Moody's expects HY bond yields to begin increasing in 2011. And while HY companies are rushing to access the current favorable HY refi window, when refi capital is still broadly available, growth capital has been extremely scarce with just 4% of last year's total HY issuance used for M&A activity (78% was for refinancing maturity extension). It would appear High Yield companies have entered "run-off" mode for credit investors, with no consideration for any residual equity value.

As if Moody's needed any more black marks against it, going through the Galleon indictment indicates that Raj Rajaratnam used, among many other tricks, a leak at Moody's to provide him with information on the Hilton Hotel LBO in which Galleon ended up making $4 million, and throwing a $10,000 kickback to the Moody's leaker. This is not one isolated incident: one can extrapolate that this kind of behavior was prevalent at Moody's (and probably at the other legacy rating agency) throughout the LBO boom. Just how many hedge fund managers made a killing by being stupid enough to buy stocks, or, a little smarter, to buy CDS or steepeners in the 2006-2007 period courtesy of Moody's leaks? Perhaps it is time to go through the phone records of every single Moody's analyst in that two year time period.

Discount retailer Dollar General, which KKR acquired in March 2007 for $7 billion is about to be sold to a new batch of investors who believe in top ticking the market.

Landry's stock tumbled today to an all time low of $6.63, before regaining a little and closing 50% down after announcing in a very cryptic press release that it is cancelling its LBO/MBO with Fertitta Holdings, the family that own

Landry's stock tumbled today to an all time low of $6.63, before regaining a little and closing 50% down after announcing in a very cryptic press release that it is cancelling its LBO/MBO with Fertitta Holdings, the family that own