Crunch time for takeover deals

Deals already signed could prove a headache for investors

The past year has seen hundreds of billions of dollars worth of takeover deals agreed.

But many of them could be in jeopardy as a result of the recent financial crisis.

Many are meant to be paid for with borrowed money - and in the wake of recent market turmoil, raising that kind of loan is becoming much harder.

The first test could come within days, as banks try to raise finance for the buy-out of credit card data firm First Data by buy-out specialists Kohlberg Kravis Roberts (KKR).

The banks advising on the $27bn (£13.4bn) deal - Citigroup, Credit Suisse, Deutsche Bank, HSBC, Lehman Brothers, Goldman Sachs and Merrill Lynch - could also suffer if they cannot find buyers for the deal.

They have underwritten the deal in the expectation of laying off the debt on other creditors, and certainly never imagined they might end up having to hold onto it.

And if the takeover boom does collapse, that could put stock markets under further pressure. The sharp gains in share prices around the world in the past year have partly been due to the huge prices buy-out firms were prepared to pay for takeover targets.

Any hiccup in the queue of deals waiting to be completed would amount to yet another indication of the problems in the US sub-prime mortgage sector infecting the wider economy.

Backlog

At particular risk are the leveraged buy-outs, or LBOs - takeovers where most of the funding is coming from borrowing - as investors try to renegotiate terms.

KEY BUY-OUT DEALS $37.4bn buy-out of energy group TXU $16bn buy-out of First Data $23.6bn buy-out of Clear Channel $23.6bn buy-out of Alltel $21bn buy-out of Hilton hotels $17.8bn buy-out of Alliance Boots Source: Citigroup, excludes debt

LBOs, including private equity deals, account for more than 80% of the publicly-announced deals in the pipeline, according to investment research firm Dealogic: $385bn out of a total of $470bn.

A collapse at the final hurdle of any of the really big deals could send a negative message to the market.

It could act as a brake on future transactions, indicating that the drying-up of lines of credit is more than just a temporary crunch.

Discount

In the midst of all this, the investment banks backing takeover finance risk being among the big losers if they fail to sell on the debts they arrange.

Following recent jitters, many risk-shy investors are looking for better prices for some deals - and that cuts into banks' fees, too.

For example, US DIY chain Home Depot recently sold its supply unit for $8.5bn.

But the final price tag was $1.8bn lower than the one the buyer - a private equity consortium led by Bain Capital Partners - had originally agreed in June.

The consortium had insisted on the discount in the wake of the recent credit market turmoil.

The smaller - in relative terms - investment banks in particular are especially dependent on revenue from deal-making.

Several sources have said Lehman Brothers and Goldman Sachs are more exposed than the larger commercial lenders such as Citigroup and JP Morgan.

But the market turmoil has also created opportunities.

Some analysts say the investment banks will simply find ways to offset their losses.

With debt worth less than it was, some investors are snapping up assets at a discount price in the hope they can make money when the markets rebound.