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Saturday, 1 September 2007

Banks caught at their own game

Oh how we laughed 20 years ago whenever a bidder paid a drop dead fee on a leveraged buy out. It was truly a mug's game. Every bidder had to line up finance, which meant paying commitment fees, but there was only one winning bidder, but even then there was a good chance that the banks would pull out on due diligence, and pocket the fees. I remember Triangle, Isoceles or whatever bidding for Safeway. What fees we made without lending a penny.

Now the boot is on the other foot according to The Times here. It seems that the banks have caught a cold over TXU. Remember them? They bought Eastern Electricity and went bust a few years later when all their gas contracts wre out of the money. Now it seems that, despite losing hundreds of millions in that disaster, US banks were still happy to pony up several billion for KKR to buy the Texan utility. And why not, for all I know Henry Kravis may be a whizz with coal fired power stations. Anyway, it seems that the banks are worried that they will not be able to sell down their underwritings. The banks' solution is to pay KKR a billion to pull the deal.

Sounds like the banks and KKR were playing poker as the credit markets crumbled and the banks blinked first. Reminiscent of the fees that changed hands over RJR Nabisco (Barbarians at the Gate), only this time they are going in the other direction.