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Market Frenzy Might Cramp LBOs and Junk Bonds in Europe, Experts Say

October 17, 1989

LONDON (AP) _ The latest world stock market turmoil might cramp the European trend toward U.S.-style leveraged buyouts and junk-bond financing, which already is threatened by high interest rates and economic worries, experts said Tuesday.

Wall Street’s near-record Friday the 13th plunge and subsequent gyrations in stock markets worldwide was sparked by the failure of a management-employee group to get financing for its planned $6.75 billion buyout of United Airlines.

Nervousness about further market volatility might make it harder for European bidders to raise funds for debt-financed deals. Would-be buyers also are likely to scrutinize the profitability and breakup value of their targets much more closely, the experts said.

Market gyrations also could exacerbate anti-buyout, anti-junk bond sentiment in Europe, where there is widespread ambivalence about the import of these American takeover techniques.

″Human nature being what it is, when there a fright in the market people immediately begin to question whether they ought to be doing what they’re doing,″ said Bruce Classon, managing director of corporate finance at Bankers Trust Co. in London.

″European banks and even American banks will be more cautious than in the past,″ said Roger Brooke, chief executive of Candover Investments, a London- based buyout firm.

Big, highly leveraged deals are raising controversy. Anglo-French financier Sir James Goldsmith’s $21 billion all-securities bid for the British conglomerate BAT Industries PLC has prompted a storm of protests in Britain.

In a leveraged buyout, or LBO, a bidder borrows funds to take over a company, then uses that company’s profits or sells its assets to pay off the debt.

Such deals frequently are financed with the high-yield, high-risk debt securities called junk bonds. Junk bonds are so named because of their low credit ratings, which means they have a considered to have greater default risk than higher-rated bonds.

A slowdown in such deals could further deflate the London stock market, which recently has gotten some support from takeover speculation.

Cheaper share prices resulting from the market downturn could spur cash buyout bids, although not to the extent seen after the October 1987 stock market crash, experts said.

″Investors and bankers are looking at economic prospects more cautiously around the world,″ said Guy Dawson, head of corporate finance at Morgan Grenfell Group PLC.

″You will see a slowdown in the market,″ Dawson said. ″Either you will see fewer buyouts or they will be done at lower prices.″

But he added, ″I don’t think it spells the end of the LBO market at all.″

Bidders turned their attention to London and the rest of Europe as a potential LBO market because competition among buyout houses in the United States has reduced yields of such deals there.

But higher interest rates in Europe have been making it more expensive to finance buyouts. In Britain, Europe’s biggest takeover market, interest rates are 15 percent, an eight-year high, partly due to government attempts to curb inflation.

Also working against LBOs are concerns about corporate profitability in a climate of slowing economic growth and higher inflation, particularly in Britain.

Critics say companies with heavy debts can go bust when interest rates rise and also have less leeway to spend money on research and development.

Europeans also are biased against buyouts because they fear they will cause job losses, worsening the Continent’s relatively high unemployment.

Matthias Graeper, a consultant in the Hamburg office of the British buyout firm Schroder Ventures Manager Ltd., said: ″There are some bad feelings about junk bonds and the purchase prices of some companies in the United States but I think we can avoid the mistakes in Germany.″

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