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Go-go years' big deals coming apart at seams

The $12 billion Tribune Co. buyout was done nearly entirely with debt; now it's running low on cash. The $12 billion Tribune Co. buyout was done nearly entirely with debt; now it's running low on cash. (Scott Olson/Getty Images/File 2002)
By Lauren Silva
The New York Times / November 24, 2008
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Some of the mega-buyouts that private equity shops labored to assemble during the go-go years of the credit boom are coming apart at the seams.

These $10 billion-plus deals were usually predicated on expectations that asset prices would rise and debt markets would remain welcoming.

With those hopes dashed, several monster buyouts are starting to fly red flags. Among the biggest, Tribune, Freescale Semiconductor, Harrah's Entertainment, Univision and Clear Channel Communications looked shaky heading into the fourth quarter. They're likely to be much worse off by its end. And, because of their size, that is another bit of bad news for the nation's economy.

Tribune looks to be the megadeal most at risk. Sam Zell's $12 billion buyout of the company, the publisher of The Los Angeles Times and The Chicago Tribune, was financed nearly entirely with debt. Operating cash flow was down by 66 percent in the third quarter. Tribune is on the cusp of breaching its debt covenants, and some of its bonds trade for as little as 9 cents on the dollar. With the advertising market deteriorating in line with the economy, Tribune has few easy options to stabilize its revenue.

Clear Channel, the radio broadcaster, is also deteriorating fast. Bought by the Boston firms Bain and Thomas H. Lee Partners, it has been through the wringer twice. The private equity firms had to pay top dollar to win shareholder approval for their $27.5 billion purchase in mid-2007. Then they were forced to go to court when lenders balked at providing financing.

Now, revenue in its radio segment is falling. It was down 7 percent year-over-year in the third quarter, and operating income was down by 20 percent. Citigroup reckons the company's debt will rise to a crushing 12.5 times cash flow sometime next year.

Harrah's, the casino operator, is also struggling. It was bought by Apollo and TPG for $26.5 billion in late 2006, and recently its earnings before interest, tax, depreciation and amortization have been rising. But its revenue is falling. Harrah's is making less money on overnight stays, and people are spending (and losing) less at its casinos. It can cut costs only so much; eventually its declining revenue will cause a cash squeeze. The company recently had to use two provisions built into its debt that are intended to conserve cash.

Another deal facing big challenges is Freescale, the semiconductor company that Carlyle, TPG, Blackstone, and Permira bought for $17.6 billion in 2006. Carlyle recently wrote down its stake in Freescale to half of what it paid. One big problem is that 90 percent of Freescale's sales in its cellular products division are tied to Motorola, whose handset sales have declined sharply. Freescale is trying to sell the division.

The Spanish-language broadcaster Univision was the subject of a heated bidding war in summer 2006 before a group led by Haim Saban paid $13.7 billion to acquire it. It is now having problems on several fronts. Debt is up by $845 million since the end of last year, and cash flow is falling. Next year, its debt-to-operating-cash-flow ratio will be a huge 13 times, assuming it refinances some of the borrowings it has coming due.

Even the healthier behemoths are preparing for shakier times.

HCA, the hospital operator, broke the record for the largest buyout ever when Bain, Kohlberg Kravis Roberts, and Merrill Lynch bought it for $33 billion in 2006. The company recently said it would try to conserve cash by paying interest on its pay-in-kind toggle notes with additional debt. HCA has good reason to do so. Fewer patients are typically able to pay their hospital bills in a downturn. The number of uninsured could also increase as people lose their jobs, chipping away at HCA's profitability.

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