Market turmoil sparks new concern about LBO deals

By Megan Davies

NEW YORK (Reuters) - The global stock sell-off of the last two days is sparking renewed concern that leveraged buyout (LBO) deals waiting to close could be at risk of falling apart.

The gap between offer prices and a number of takeover target companies' stocks widened on Tuesday as traders worried a weaker economy would make buyers more likely to walk away, or banks more likely to squirm out of financing the transactions.

Among the large deals that traders are watching closely are the buyouts of U.S. radio operator Clear Channel Communications Inc (CCU.N: Quote, Profile, Research, Stock Buzz) and business services company Alliance Data Systems Corp (ADS.N: Quote, Profile, Research, Stock Buzz), whose shares fell on Tuesday.

The cost of financing LBOs has risen since the summer when defaults on subprime loans caused turmoil in the credit and equity markets -- prompting a number of deals to fail, such as the $1.8 billion sale of mortgage and vehicle fleet company PHH Corp (PHH.N: Quote, Profile, Research, Stock Buzz) and the buyouts of equipment renter United Rentals Inc (URI.N: Quote, Profile, Research, Stock Buzz) and audio equipment maker Harman International Industries Inc (HAR.N: Quote, Profile, Research, Stock Buzz).

"I think the recent events suggest that deals may be more at risk and suggests that there may be some very serious questions about liquidity in this marketplace," said Brian Trust, a partner at law firm Mayer Brown, who specializes in financially distressed companies. "These deals depend on liquidity so that finances can be raised from multiple sources including, significantly, the banks ..." said Trust. "It creates a lot of risk to deals in the pipeline."

WIDER DEAL SPREADS

"LBOs are the deals that most are nervous about," said one arbitrage trader. "Across the board you are seeing nervousness, but the things to focus on are the LBOs and the bank deals."

Traders have shown particular concerns about the $6.8 billion buyout of Alliance Data by private equity firm Blackstone Group LP (BX.N: Quote, Profile, Research, Stock Buzz). Alliance Data shares tumbled 16 percent on Thursday on speculation it was in trouble, although recovered the following day after the company said the deal was not being renegotiated and it believed deal financing remained fully committed.