Viewpoint -- Show Somebody The Money

Dec. 21, 2004
Financing shortage squeezes corporate strategy.

What's a CEO to do when your stock is down, and no one appreciates your plans for long-term glory? The corporate equivalent of stomping home with your little red wagon is to sell -- maybe to a financial buyer who borrows money for the deal -- or borrow the money yourself and go private. Nowadays, either is unlikely: Many are asking to borrow, but few have chosen to lend. Whether a company is looking for a buyer, or hoping to take the company private so it can implement its master plan without taking any guff from Wall Street and public shareholders, the lack of financing is holding things up these days. The forest-products company Georgia-Pacific is a case in point. Georgia-Pacific stock closed Nov. 20 at 23.94, way off its 52-week high of 51.94 and its historic high of 54.12. The company is committed to a long-term plan for improving profitability, but understands those that are skeptical because the company, and the entire forest-products industry, have long resisted change. Georgia-Pacific is getting out of timber, with its perpetual problems of over-capacity, and will keep only the most profitable and least volatile of its other businesses. It's repositioning itself as the maker of products you need that are made out of timber, such as paper towels and tissues; its Quilted Northern brand has been on the shelves since long before our American grandmothers had the right to vote. And it's starting to make some stuff you didn't know you needed, such as multi-colored toilet tissue. CEO A.D. "Pete" Correll said recently that the company wants to capitalize on Georgia-Pacific's strong name recognition with consumers. It doesn't matter that most people think it's a railroad, he said, because they also think it makes quality products at a fair price. All of this repositioning and restructuring might be a little easier if Georgia-Pacific went private. Disgruntled shareholders would get bought out, and the company wouldn't have to compete for the affections of Wall Street. Georgia-Pacific has considered such a move, CFO Danny Huff. Why haven't they? Lack of financing. Such a transaction would require a huge amount of debt, and nobody in the bank loan market or in the high-yield bond market is in the mood. The lack of financing also affects buyout firms, says David S. Lobel, managing partner at Sentinel Capital Partners in New York. Sentinel typically makes $100 million to $150 million investments, with an exit horizon of five to seven years. "The high yield market doesn't exist," he notes. What about bank loans? Banks are stricter than they were a year ago, Lobel says. Banks right now will lend an amount only between 2.5 and 2.75 times cash flow (earnings before interest, taxes, depreciation, and amortization) for a buyout, he says. But a year ago, banks were willing to lend amounts between 3.5 and 4.0 times cash flow. "A full multiple point contraction, that's the bottom line." Financial buyers like Sentinel might contribute more equity than is customary to make individual deals happen, but they can't make a habit of it. "You won't generate the returns if you pay the same prices without the debt and put in more equity, Lobel says. "So the prices have got to come down, or the guys aren't going to buy the companies.

Vicki Zunitch writes for BridgeNews.

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