John Fiedler should be headed for the exit. BorgWarner Inc.'s chief executive runs a fast-growing supplier of drivetrain systems with a focus on four-wheel drivetrains for trucks, in Chicago, Illinois. He maintains tight financial controls and is not afraid to sell unprofitable divisions. His reward: a slumping stock price and skeptical investors.
The case for taking a company private has rarely been more tempting. But just as the leveraged buyout has surged in popularity as a strategy to exit the vagaries of the public market, the door is starting to close. Higher interest rates make deals more expensive. And bankers are nervous about lending to a cyclical industry facing a sales downturn. Those twin pressures seem likely to slow the pace of leveraged buyouts, which had been occurring at a rapid clip.
A leveraged buyout is simply a way to purchase companies using large amounts of borrowed money to buy out shareholders. Leveraged buyouts have come a long way since the 1980s, when they were sometimes viewed as a tool of unscrupulous financiers.
The New York investment firm Kohlberg, Kravis, Roberts & Co. used it to acquire RJR Nabisco for $25 billion, an exploit that made for compelling telling in the book Barbarians at the Gate. Now mainstream automotive suppliers are asking buyout firms and Wall Street merchant banking operations to finance buyouts.
Heartland Industrial Partners LP, the brainchild of former U.S. President Ronald Reagan's budget chief David Stockman, is one. He is taking MascoTech Inc., a supplier of parts for engines and drivetrains, private in a $2 billion deal this year. Stockman also bought Simpson Industries Inc., a supplier of balance shafts and water pumps, for about $350 million in cash and assumed debt.
There is no shortage of leveraged buyout sponsors, but doing deals now is more difficult. Bankers are limiting the amount of senior debt they will lend. That forces buyout investors to put up more of their own equity and pay more for high-risk financing.
But buyers still can scoop up proven companies at attractive prices. Such buyers then are willing to invest additional funds to spur their expansion. That is a strong lure for small or middle-sized publicly owned suppliers whose growth is stunted. Despite decent profits and sales growth, their stocks trade at depressed prices. That limits their ability to raise new capital for growth, and access to capital is a primary reason for being a public company.
These publicly owned suppliers 'have all the disadvantages of being a public company and few of the advantages,' said investment banker Cliff Roesler of W. Y. Campbell & Co. in Detroit. Going private means no more expensive securities filing, no more quarterly goals to meet and no more pressure from Wall Street.
Too Much Debt?
But that's not for John Fiedler. He's seen it all before. In 1987, BorgWarner was a conglomerate that avoided a hostile takeover by going private. But the deal required taking on $4.2 billion in debt, with interest that accrued at a rate of $1,000 per minute. 'Going private means mortgaging your future - then adding still more loans,' Fiedler said. 'It doesn't make good economic sense.'
To pay down debt, Borg-Warner sold its chemicals and plastics, financial services and information services companies. The company then sold shares as it emerged again as a public company in 1993. Fiedler became chairman the next year.
BorgWarner's lessons: Taking on debt requires a careful focus on the balance sheet plus an emphasis on cash flow. And paying off those loans means selling the company or taking it public again, a tricky proposition. 'We managed to take it public during a bull market, and even then it was a tough sell,' Fiedler said, 'We were lucky to come back with a viable company.'
Fiedler's warning may not deter other candidates for leveraged buyouts, but nervous bankers might. Lenders are demanding higher interest rates and stiffer terms. They are cutting back the amount of funding, said Sarah Kneisel, a veteran of several automotive suppliers and now vice president of Wind Point Partners, a private equity firm in Southfield, Michigan, which has negotiated 10 leveraged buyouts this year.
Bankers are worried about a downturn in the automotive market, she said. The financial collapse of Key Plastics LLC, Cambridge Industries Inc. and Breed Technologies Inc. also makes bankers reluctant to do automotive deals, she said.
Fiedler says he intends to keep his company public. Sure, the auto industry is tough, but every industry is tough, he says. 'We chief executives complain about the issues we face,' he said. 'But if you can't make it as an American public company, you can't make it anywhere.'
You can e-mail writer Robert Sherefkin at [email protected]