Market Overview
Recent hurricanes coupled with high gas and home heating prices could begin to effect consumer spending just as retailers’ crucial holiday season begins. A widely watched sign of consumer sentiment, the Consumer Confidence Index, fell to 85 in October, the lowest level for the index since October 2003. Analysts had predicted a level of 88, and attributed the larger than expected drop to inflationary pressures from high energy costs. A decrease in consumer spending could have a broader effect on the overall US economy, as household buying accounts for more than two thirds of gross domestic product. For the past two years, real consumer spending has grown at nearly 4% a year; however, experts see that growth decreasing to around 3% for the end of 2005 and 2006.
Another factor influencing consumers' ability to spend is the slowing US housing market. As interest rates continue to rise, refinancing activity is slowing, with Freddie Mac forecasting that cash-outs taken during refinancing will drop from $162 billion in 2005 to $69 billion in 2006. Of the $162 billion forecast for 2005, $102 billion was cashed out in the first half of the year. As borrowing against homes added $600 billion to consumers’ spending power last year, and research has shown that one quarter to one third of that money is used for current consumption, housing equity accounted for 30-40% of the increase in consumer spending last year. However, experts do not see the slowdown in the housing market posing a danger to the US economy, as the consensus potential growth rate for 2006 of 3.25% remains in line with adjusted Q4 2005 expectations.
Merger Overview
The buyout market has continued its red hot pace, with the $50.5 billion of sponsor backed LBOs completed in Q3 2005 blowing away the next highest quarter, the $46 billion completed in Q4 2004. The 191 deals completed represents a slight decline from Q1 and Q2 numbers, 218 and 223 respectively, as the deals this quarter were skewed toward several high profile transactions, headlined by the SunGard Data Systems and Toys “R” Us deals. There appears to be no letup in the amount of activity heading into Q4, as buyout firms have raised more than $100 billion over the first three quarters of 2005 and more than 120 control-stake deals are in the pipeline with an announced value of $97 billion.
The Clayton, Dubilier & Rice buyout of Ford Motor Co.’s Hertz rental car business is the latest of 2005’s high profile buyout deals. The deal is structured with $2.3 billion in equity and approximately $12 billion in debt, with $7 billion being asset backed lending and $ 5 billion a combination of bank debt and bonds. Ford will realize $5.6 billion on the sale, with the buyout consortium assuming approximately $10 billion in Hertz debt. If the buyout of the Hertz rental car business closes in Q4, surpassing the $11.3 billion SunGard deal for the second largest buyout behind KKR’s 1989 acquisition of RJR Nabisco, it will give 2005 the second and third largest buyout deals in history.
Note: Mirus Capital Advisors has switched to using CapitalIQ as its primary source for the Mirus Middle-Market Monitor. All historical analyses have been fully updated, so the results presented in this edition are consistent over time.
