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At a glance: Deal type: $11.3 billion leveraged buyout of Sungard Data Systems by Silver Lake Capital Partners, Kohlberg Kravis Roberts, Providence Equity, Bain Capital, Blackstone Group, Texas Pacific Group, Goldman Sachs Financial adviser: CSFB Fairness opinion: Lazard Financing arrangers: Deutsche Bank, Morgan Stanley, JPMorgan, Citigroup, Goldman Sachs |
When the $11.3 billion leveraged buyout of Sungard Data Systems was announced in March 2005, it broke a number of records, shocking the market. At $3.5 billion, it was the largest equity cheque ever written for an LBO, the largest ever buyout of a technology company and included the largest ever consortium of sponsors. On top of that, it was the biggest buyout since the RJR Nabisco deal 16 years earlier.
Record breaker though it might be, the LBO of the financial services software company was also greeted with healthy scepticism. What were so many private equity sponsors doing clubbing together and writing such a large equity cheque in a sector where buyouts were seen as risky, not to mention that this loaded the deal up with 7.3 times debt to ebitda? And how on earth were sponsor banks going to find $8 billion to fund the debt portion?
“Twelve months ago, people thought that tech companies could not be subject to an LBO, and certainly not with 7.3 times debt to ebitda,” says Boon Sim, head of M&A for the Americas at Credit Suisse. “People would have just laughed at you.”
In fact, Sungard turned out to be a ground-breaking M&A deal, as well as the leveraged financing success that transformed the market in 2005. It already looks as if it will be trumped in size by the $15 billion buyout of Danish telecoms company TDC, assuming that deal closes successfully. Now, with large private equity consortia commonplace, and Sallie Mae likely to be an LBO target before too long, no sector is out of bounds. Writing a cheque for $3.5 billion was a big deal in March 2005 as most private equity funds did not have funds much bigger than this; jump forward less than a year and firms are raising $10 billion in new funds themselves.
“The deal opened everyone’s horizons; in many ways in was a seminal deal,” says Boon. “Prior to Sungard, $3 billion had been a big buyout. Now deals of $20 billion to $30 billion will come.”
| Condé: private equity owners give Sungard a much longer time horizon |
Despite its unprecedented size, the financing of Sungard was also a tremendous success. The $4 billion term loan B tested the capacity of the institutional loan market but ended up performing very well. “The institutional loan market had been growing and investors were expressing interest in large, liquid transactions,” says Richard Zogheb, co-head of global loans and leveraged finance at Citigroup. “Because of the quality of Sungard’s business, we felt this was the one to test the market. But demand even exceeded our expectations, and the loan has traded very well in the secondary market.” Refinancing the $3 billion bridge commitment was a bigger challenge. Mark Epley, head of the financial sponsors group in the US at Deutsche Bank, says: “Getting the bank deal done was not our greatest concern; selling the last billion-and-a-half of the high-yield bond was where we saw the real challenge, especially since we committed to the deal right before the high-yield market seized up.”
The leads thought they might have to issue $2 billion of bonds initially and then refinance the rest when the high-yield market had strengthened. In fact, there was no need for this. “We originally launched a $1.25 billion senior note but, given the demand, we were able to increase that to $2 billion and then to launch a subordinated note later that day after the senior notes began trading,” says AJ Murphy, director in high-yield capital markets at Deutsche Bank. At $3 billion in total, it was the largest high-yield bond to hit the US market since 1999 and the fact that it traded up a bit actually helped the high-yield market out of its three-month rough patch. Once it had performed well for investors, it was much easier for them to get comfortable about other large high-yield bonds and, indeed, leveraged loans.
Most important, Cris Condé, president and CEO of Sungard, says he’s very happy with the way the deal has worked out, although he’s looking forward to getting back to normality after all the end-of-year publicity is over. “We never set out to break any records, but we have absolutely zero regrets about not being a public company any more,” he says. “The public market never really understood us and our private equity owners have a much longer time horizon.”
