BusinessTN

To hear some market voyeurs dissect HCA's record- breaking, $33 billion public-to-private metamorphosis of last July, it may seem as simple as changing socks. What's the intrigue? —they ask. This is the second time the hospital company has gone private, having also done so in 1987, and — mark our words! — will go public once again in a couple of years. Those same voices would claim that, despite the billions of dollars involved, including the assumption of $11.7 billion of debt in a transaction led by Kohlberg Kravis Roberts and the Frist family, it's pretty boring — or at least hard to get excited by — stuff. Far less boring, however, are the record numbers in which Tennessee public companies, mirroring a national trend, are lining up in front of private equity and other buyers in an effort to go the way of HCA. During the past year and a half, eight high-profile publicly traded outfits succumbed to private equity overtures. Among them are such staples of Tennessee's economy as Dollar General, Central Parking and Genesco. Still more, including Louisiana Pacific, are rumored to be pursuing going-private opportunities.

Looking at the fees collected from ongoing buyouts, and doing the math on potential future deals, it's hard to predict where it will stop. "I don't think any of us have a crystal ball that good. We're only lawyers — more riding the bull than leading it into the ring," observes Chase Cole of Nashville law firm Waller Lansden Dortch & Davis, which advised HCA in its 1992 post-LBO public offering. Meanwhile, in just seven years, the number of U.S. private equity firms operating has shot up from 900 to 1,700, and all of them are looking at companies whose shares have been neglected by shareholders. The value of deals struck last year, most of which involved taking public companies private, was $475 billion, up from $37 billion in 2002. "Almost every public company is [an acquisition] candidate these days," says Morgan Keegan's head of corporate finance Chip Grayson in Memphis, where ServiceMaster Co. and Back Yard Burgers are the most recent members of the going-private club. ServiceMaster agreed in March to be bought by private equity group Clayton, Dubilier & Rice in a cash and debt deal valued at $4.7 billion. Back Yard Burgers announced its $38 million buy-out plans in June. The investment partnership buying the burger chain is managed by Cherokee Advisors of Atlanta, one of whose principal advisors is Steve Lynn of Nashville, the former CEO of Shoney's Inc. and Sonic Corp.

Who's Bought?
Gone Private(Announced)Genesco | 06/07 Finish Line $1.5 billion
Back Yard Burgers | 06/07 Cherokee Advisors $38 million
Direct General Corp. | 05/07 Texas Pacific Group, Fremont Partners $628.2 million
Symbion | 4/07 Crestview Partners $637 million
Dollar General Corp. | 3/07 Kohlberg Kravis Roberts & Co. $6.9 billion
ServiceMaster | 3/07 Clayton, Dubilier & Rice $5 billion
Central Parking | closed 2/07 Kohlberg & Co., Lubert-Adler Partners and Chrysalis Capital Partners $1 B
Goody's Family Clothing | 12/05 GMM Capital, Prentice Capital Management $903 million

This is not the first time corporate America has been wooed en masse by private equity. The Economic Tax Recovery Act of 1981 sent wads of cash to corporate balance sheets, and inspired Michael Milken, whose well-publicized quest to popularize below-investment grade, or "junk," bonds led to the downfall of investment bank Drexel Burnham Lambert. The easy availability of debt fueled the boom of highly leveraged buyouts and hostile takeovers of underperforming companies by the likes of T. Boone Pickens, Sir James Goldsmith and Carl Icahn. Four years before KKR capped that boom with its legendary takeover of RJR Nabisco in 1988, it funded the equity buyout of Memphis grocery chain Malone & Hyde — a transaction that later resulted in the spin-off of auto parts retailer AutoZone. Also in Tennessee, there was the bidding war for Memphis food processing company Holly Farms, won by Tyson Foods; the multi-billion dollar leveraged buyout of HCA, which re-emerged as a public company in 1992; and the famous purchase of Nashville's Third National Bank by SunTrust in 1986, right before the collapse of the savings-and-loan industry. Then, of course, came the recession of the early 1990s.

And with things being cyclical the way they usually are, interest rates could move up again, causing the funds to dry up from lenders. "Recession is always a risk when there is a lot of leverage," Cole says. "One hopes, because of [past] experience, that the current investors are being extra careful in doing their projections, making sure they have solid cash flow, and not leveraging companies at quite an aggressive ratio as was done then."

Who's next?
Rumors of Louisiana-Pacific looking especially ripe for a private equity buyout because of its assets and cash flow originated at the end of 2006, prompting an upgrade of its embattled shares to "Buy" from "Neutral" by Banc of America Securities. But, as buyout and merger prospects remained murky, four consecutive downgrades followed, the last one being a "Strong Sell," as of mid-June, when LP shares were changing hands at $19.96. Analysts suggested that the housing slump contributed to the attractiveness of Nashville-based LP, the world's leading producer of oriented strand board, as a takeout target.

Despite such hopes, there are voices of concern, some of them originating within the private equity industry itself. Bill Conway, co-founder and chief investment officer of The Carlyle Group, was recently reported by The Wall Street Journal as advising his colleagues in an annual letter to pay down debt or look for "multiple and early exit paths." The newly minted Dave Ramsey of the private equity world, Conway advised focusing on lower-risk deals with smaller returns, largely attributing the current sky-high private-equity returns to the availability of cheap debt, not to a surplus of brains behind the deals. Carlyle, which hired Nashville dealmaker Will Johnston a year ago to scour the local scene for potential health care buys, did the cut-run-act with Hertz, which it bought from Ford in partnership with two other investors in 2005, selling the company back to the public a year later. Carlyle is expected to nearly double its $2.3 billion investment in the deal.

Still, market-watchers smell more buyouts in the pipeline. Apparently, going private makes a ton of sense in health care, and not just because of Sarbanes-Oxley, which has become a costly burden on public companies willing to remain listed. "I think we'll continue to see more transactions on the private equity side as it relates to health care because the companies' valuations justify and warrant that kind of investment," predicts Ken Melkus, who has been active in Nashville scouting deals as consultant to the New York-based leveraged-buyout firm Welsh, Carson, Anderson & Stowe. According to Melkus, some of the forces at play here are reductions of reimbursement by Medicare and the fact that returns of 20% and higher on private equity deals have far exceeded those of traditional equity markets.

But don't look for banks to join hands with private equity buyers, largely because some of the best ones have been pretty involved in mergers and acquisitions of their own, the Regions-AmSouth deal being one obvious recent example. Also, overall it's easier for bank holding companies to play with each other, since private equity companies, unlike banks, are unregulated by the government (and prefer to remain that way). According to Bass, Berry & Sims attorney John Good, technology and high-growth companies are also less likely to go private, though in their case, it's due to the lack of steady cash flow and tangible assets on their balance sheets. (The fewer tangible assets there are to liquidate, the harder it is to find financing when things go south.)

Who's Buying?
Other Out-of-state Private Equity Scouting for Deals in Tennessee
Out-of-state Firm Local Representitive
Blackstone Group | New York City
Garret Moran
The Carlyle Group | Washington, DC
Will Johnston
Welsh, Carson, Anderson & Stowe
Ken Melkus
Ripplewood Holdings | New York City
Tim Collins
Madison Dearborn Partners | Chicago
Nicholas Alexos

But the private equity firm looking for ripe industries need not fear, Tennessee still has some target-rich environments. The next wave of acquisitions in the Volunteer State,Good says, could be the REITS. There are a good number of them, looking very attractive right now to potential buyers with their high, and therefore easily financeable, asset valuations.Publicly traded restaurant chains, of which there are a few in Tennessee, are attractive targets, as well. Beyond Back Yard Burgers, there was the $486 million sale of CBRL subsidiary Logan's Roadhouse last October to New York private equity firm Bruckmann, Rosser, Sherrill & Co., along with Los Angeles-based investment firm Canyon Capital Advisors. (At first, CBRL considered spinning out Logan's in an IPO, but opted for a private sale instead.)

Even with the recent frenzy, there remain about 15,000 public companies left in the nation, and it's a good bet that someone, somewhere has crunched the numbers on them all. The next few months should tell whether the current cycle is running its course, or whether it's time for analysts and commentators everywhere to start dusting off some other phrases from our fiscal past. "Irrational exuberance" comes to mind.