Reuters Summit - Bankers see rebound in leveraged deals

TORONTO, April 5 Wed Apr 6, 2011 3:42am IST

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TORONTO, April 5 (Reuters) - Expect more debt-backed takeover bids like Valeant Pharmaceuticals' offer for Cephalon Inc now that credit markets are largely recovered from the financial crisis, top bankers said on Tuesday.

Large leveraged deals, which were wildly popular just before the crisis, will gather steam both globally and in Canada given interest rates still at or near historic lows and increased investors confidence, bankers told the Toronto leg of the Reuters Global Mergers and Acquisitions Summit.

"Credit is a lot more available. You're seeing leverage multiples go up. You have private equity buyers who are sitting on a lot of investment capital," said Peter Buzzi, co-head of the mergers and acquisitions (M&A) group at RBC Capital Markets.

"You're definitely going to see more transactions of that nature."

Private equity-style takeovers -- known as leveraged buyouts or LBOs -- plunged after the credit crisis as access to debt financing froze.

CIBC's Michael Boyd, the bank's head of M&A, said he was surprised how quickly and dramatically the credit markets have bounced back and at the magnitude of leverage available to fund deals.

"If you'd asked me a year ago if you'd see a $5 billion LBO in the next two years, I probably would have said 'no' because people's memories of the financial crisis were pretty fresh," he told Reuters.

"Now we're seeing deals of that size. People are talking about LBOs larger than that -- $10 billion, $15 billion."

Recent deals by private equity firms include Blackstone Group LP's plans to buy Australia's Centro Property Group for about $9.4 billion and KKR & Co LP's plans to buy the hard capsules unit of Pfizer Inc for nearly $2.38 billion.

One of last year's largest leveraged buyouts was the acquisition of British car parts maker Tomkins Plc by Onex, Canada's largest private equity firm, and the Canada Pension Plan Investment Board for about $5 billion.

While private equity firms are the ones who typically finance their acquisitions with large amounts of debt, the Valeant move indicates companies are also taking advantage of the strength in the credit markets.

However, the amount of leverage as a percentage of deals is likely to be tempered this time and not go to extreme levels seen before the financial crisis hit, said Andre Hidi, head of global M&A at BMO Capital Markets, a unit of BMO Financial Group.

"We'll continue to see large leveraged transactions, whether by sponsors or in even some cases by corporates who want to offer cash," he said.

The availability of debt has helped drive up deal sizes. Hidi estimated the average deal size, excluding those below $100 million, in Canada has surged to $1 billion, compared with $500 million a year ago.

(Reporting by S. John Tilak and Pav Jordan; Editing by Jeffrey Hodgson and Tim Dobbyn)

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