Fewer Firms Go Private Despite Volatility

The pace of public companies going private has declined in recent months, and the number of such deals is likely to fall short of last year’s totals, surprising analysts who expected this would be a record year for such transactions.

Given the stock market’s volatility earlier this year, many analysts had expected more public companies with depressed stock prices to elect to become private companies again, either through a merger with another private company or through a leveraged buyout.

However, there have been only 79 such deals nationwide so far this year, and nearly 40% of them were announced in the first three months, including such blockbusters as the $17-billion transaction that would take Silicon Valley pioneer Seagate Technology Inc. private. That one deal has driven up the value of public-to-private deals so far this year to $35.4 billion, surpassing last year’s $22.4 billion. Yet the number of deals overall is down from last year’s 84 deals by this time, according to MergerStat, a Los Angeles merger and acquisition data service.

Among California-based firms, there have only been nine such deals, including a $321-million buyout of Santa Monica-based Veterinary Centers of America Inc. by Leonard Green & Partners in Los Angeles.

“It has not taken off after the first quarter,� said Kurt Kunert, editor of MergerStat. “Activity would really have to pick up for it to even catch last year.�

Analysts and buyout financiers said that’s not likely. Although there are a lot of public companies that may now wish they were private again, the debt-financing markets have made leveraged buyouts very difficult. It has been hard to find buyers for high-yield debt, said financiers.

A buyout to take a company private is often done with the help of investment firms that consider these companies worth more than public shareholders are willing to acknowledge.

Often these are done as leveraged buyouts: The investment firm puts up a certain amount of equity, but the bulk of the money used to buy back the publicly traded shares comes from debt issues by the company. The interest on the debt is repaid with the company’s cash flow or by paring assets.

This year, however, “The financing markets have been sticky,� said Brad Freeman, head of Freeman Spogli, a Los Angeles buyout firm that has raised hundreds of millions of dollars in several buyout funds. “It’s not the equity that’s been a problem; it’s the debt side.�

Indeed, buyout funds have raised record amounts of cash in recent years, often from institutional investors flush with stock market profits. Kohlberg Kravis Roberts & Co., for instance is aiming to amass as much as $10 billion this year, to create the world’s largest buyout fund.

Buyout funds have averaged annual returns of 20.4%, in the last 20 years as of March 31, according to Venture Economics, a Newark, N.J.-based research firm. Over the last three years, returns have averaged 21.8%.

Encouraged by buyout funds, in recent years, an increasing number of public companies have gone back to being privately held. Usually candidates for privatization are solid businesses that have trouble attracting stock market investors and consider their shares undervalued.

In 1996, 60 public companies elected to go private. The number rose to 89 companies in 1997, 90 companies in 1998 and 115 in 1999.

“There are still tremendous opportunities in taking companies private,� said Jonathan Sokoloff, a partner with Leonard Green, which has a $1.25-billion buyout fund. The firm is currently working on three Southern California buyouts: Costa Mesa-based WhiteCap Industries Inc., San Diego-based PetCo and Veterinary Centers.

“CEO’s welcome you with open arms once they realize how frustrating it is being a public company. Many are eager to make a change,� he said.

But with many bond investors nervous about high-yield debt amid the slowing economy, deals are a tougher sell.

WhiteCap had to pull a high-yield bond deal in January, when few buyers emerged after the road show. A private placement borrowing was done instead, and the WhiteCap buyout deal still hasn’t closed, Sokoloff said.

“Guys like us have to jump higher and be a little cleverer in this environment,� he said. “We’re pretty proud that in this hostile climate we’ve been able to get three deals nearly done.�

When debt financing gets easier, analysts expect more public companies with a beaten-down stock to consider going private.

Another downturn in the stock market that could make share prices dirt-cheap could also spur the trend.

But in the Internet arena, just because a stock is cheap doesn’t mean a company is a good privatization candidate. Buyout candidates typically are established businesses with good cash flows.

Many buyouts firms report getting a lot of calls from Internet commerce firms desperate for cash.

“We don’t jump into that puddle,� said Sokoloff.

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Times wire services were used in compiling this report. Remember that initial public offerings are highly speculative and not suitable for all investors. Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at [email protected] or Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.