Leveraged buyouts (LBOs) are a somewhat risky type of investment that often results in big payoffs. It involves a company borrowing a significant amount of capital in order to acquire another company, allowing businesses to make acquisitions without risking a lot of their own capital. Some investors don’t think highly of LBOs because in the 1980s, the vast majority of bonds sold to finance LBOs lost money. However, in some cases, private equity firms that fund LBOs end up making a lot of money. Here are some top leveraged buyout success stories.
1. Safeway (1988)
In the late 1980s, the Safeway supermarket chain was in danger of closing because of financial problems. Safeway had already been subject to a hostile takeover and was billions of dollars in debt when Kohlberg Kravis Roberts, the company that owns Stop N Shop, acquired it using leveraged capital. Once the deal went through, Safeway was able to accelerate its restructuring process, helping the company to quickly become profitable again. KKR sold the worst-performing stores and focused on the remaining assets. By the end of 1988, Safeway was again in the black.
2. Dell/Silver Lake (2013)
By the middle of 2013, Dell was a poorly performing stock. It decided to use a leveraged buyout to go private and regroup. Silver Lake acquired Dell using 85 percent leveraged funds. This move forced out most of Dell’s board of directors, allowing the company to go from a poorly performing public company to a private company with billions of dollars in assets. Financial experts predicted the new company would begin with a return on investment of 11 percent on the leveraged funds. They were right.
3. RJR Nabisco (1988)
RJR Nabisco, one of the biggest sellers of both tobacco and breakfast cereals (the company was the result of a merger between RJR Tobacco and Nabisco food products), was one of the last of the big LBO deals to go through in the late ’80s. Like Safeway, this buyout eventually went to KKR. There was fierce competition as to who would actually win the bid to buyout the company, and Nabisco had to guard against leaks to the media about the deal because it didn’t want stock prices to be affected prior to the buyout. In the end, KKR was able to use leveraged capital to purchase Nabisco, making a profit of $53 million.
4. Blackstone’s Acquisition of Hilton Hotels (2009)
The LBO in which Blackstone bought out Hilton Hotels very nearly was a cautionary tale rather than a success story; its success is even sweeter in light of the circumstances. The original acquisition occurred in 2007, just months before a major financial crisis hit, causing stocks to plummet; luxury hotels were among the hardest hit, as people just could not afford them. As a result, Blackstone lost money.
In the midst of this crisis, a rival hotel chain, Starwood, brought a federal lawsuit claiming that Blackstone/Hilton had stolen trade secrets and engaged in other unfair competitive practices, triggering an investigation by the U.S. Department of Justice. However, because Blackstone had restructured its debt soon after the acquisition and focused on best management practices rather than just cutting staff, it survived all of these problems. When the company went public in 2013, it was worth over $12 billion, making this LBO the most successful in history.
5. Houdaille Industries (1978)
Houdaille Industries was one of KKR’s first LBOs, as well as one of the most profitable. This company was an auto parts manufacturer that was originally owned by French immigrants. It was fairly profitable, but in the late 1970s, one family was buying up all of its stock in an effort to take control of the company. Rather than wage an internal war, Houdaille chose to enter an LBO arrangement with KKR to stop the takeover. Although the Federal Reserve Board raised interest rates soon after the acquisition, KKR was able to restructure the company and ended up making a profit of $335 million by the time it was resold in 1986.