10 Most Famous Leveraged Buyouts

Debt comes in many different forms from credit cards, to loans, to mortgages. It's a very important part of the business world and is used by both individuals and corporations. People can use debt to buy homes and cars, or to make everyday purchases without having to pay for them right away. Similarly, companies can borrow money from lenders to fund their businesses, conduct much-needed research and development (R&D), or even for their expansion plans. This includes making acquisitions. These are called leveraged buyouts (LBOs). Read on to find out more about LBOs and the most famous buyouts in business history.

Key Takeaways

  • Leveraged buyout refers to the use of borrowed money to fund the acquisition of another company.
  • The purpose of an LBO is to allow companies to make large acquisition without committing much capital investment.
  • The top three LBOs in history are the ones involving Energy Future Holdings, Hilton Hotel, and Clear Channel.

What Is a Leveraged Buyout?

The term leveraged buyout refers to the use of borrowed money to fund the acquisition of another company. Put simply, a company that takes on more debt to fund the cost of acquisition of another company is said to undergo a leveraged buyout. Leveraged buyouts use the targeted company’s assets as collateral, as well as those of the acquiring company, to secure the credit necessary to purchase the company.

LBOs are also commonly known as hostile takeovers because the management of the targeted company may not want the deal to go through. Leveraged buyouts tend to occur when interest rates are low, reducing the cost of borrowing, and when a particular industry or company is underperforming and undervalued.

Most LBOs take place when interest rates are low, thereby reducing the cost of borrowing.

The goal of leveraged buyouts is to make a large acquisition without committing much capital investment. The desired result of combining the two companies is the creation of one stronger, more profitable entity that better maximizes shareholder value. LBOs may be done to help a public company transition to a private one, to sell off a segment of a business, or to transfer private property from one entity to another.

1. Energy Future Holdings

In an era of so-called mega-buyouts between 2005 and 2007, the biggest of them all was the $48 billion acquisition of the largest electricity utility in Texas, then known as TXU, by a consortium led by Kohlberg Kravis Roberts & Co., Texas Pacific Group (TPG Capital), and Goldman Sachs.

The deal was based on the belief that rising demand for energy would stretch supply and push up electricity prices. Shortly after the deal was completed, increased horizontal drilling, or fracking, led to the U.S. shale gas revolution and energy prices tumbled.

The newly-founded company, Energy Future Holdings, filed for Chapter 11 bankruptcy in 2014, qualifying as one of the 10 biggest nonfinancial bankruptcies in history. America’s most famous investor, Warren Buffett, was even convinced the deal could not miss and ended up losing nearly $900 million.

2. Hilton Hotel

At the height of the real estate bubble in 2007, the Blackstone Group bought Hilton in a $26 billion leveraged buyout. When the economy slumped into crisis soon after the deal was struck, it appeared it could not have picked a worse time, especially when some of its partners—Bear Stearns and Lehman Brothers—fell apart.

Things turned around drastically when the company went public in 2013, famously transforming the Hilton deal into the most profitable private equity deal ever. The investors who weathered the storm became legendary, making $12 billion on what many analysts believe to be the best-leveraged buyout of all time.

In 2018, Blackstone sold its stake in the hotel chain. The private equity firm unloaded 15.8 million shares. Hilton estimated the sale would generate $1.32 billion.

3. Clear Channel

The nation’s largest radio station owner was acquired in 2006 by Bain Capital and Thomas H. Lee Partners for $27 billion. This figure included an $8 million repayment of debt. In a deal that got messy, the private equity firms involved went to court to force the banks to complete the largest buyout in the media and entertainment industry.

In 2014, the company changed its name to iHeartMedia, Inc. in an effort to reflect its evolving strategy as more listeners go online and listen to music via the iHeartRadio app.

4. Kinder Morgan

The Houston-based pipeline operating company Kinder Morgan agreed to a buyout offer from a group of investors led by its chair and co-founder, Richard Kinder. In a story full of twists and turns, shareholders sued, believing Kinder kept the deal a secret from his own board. The deal was highly criticized for the abundance of conflicts of interests.

Having only advised the company previously, Goldman Sachs became part of the investment group that helped Richard Kinder complete the deal to buy his own company. The company was taken public in 2011 in the largest American private equity-backed initial public offering (IPO) ever.

5. RJR Nabisco, Inc.

Decades later, the RJR Nabisco deal of 1989 is still the most iconic and famous private leveraged buyout of all time. By pulling off the deal valued at $31 billion, or $55 billion when adjusted for inflation, Kohlberg, Kravis, Roberts & Co. is credited with spawning the boom of leveraged buyouts that followed.

The deal was so groundbreaking, it was the inspiration for a book and successful movie, both titled "Barbarians at the Gate." Spoiler alert: RJR Nabisco ended up being broken up and KKR vowed to never put so much into one investment again.

6. Freescale Semiconductor, Inc.

A familiar face to many of the largest leveraged buyouts in history, the Blackstone Group was part of a consortium of investors that were part of the 2006 buyout of Freescale Semiconductor for $18 billion. The acquisition of the former Motorola property is famous for being the largest leveraged buyout of a technology firm in history.

The company almost did not survive after severely underestimating its debts but rose from the ashes with a 2011 IPO.

7. PetSmart, Inc.

In an era when leveraged buyouts are much less common, the $9 billion acquisition of PetSmart in 2014 is notable for being one of the largest leveraged buyouts since 2007.

A group led by the British buyout firm BC Partners was among several interested investment groups looking to improve upon the company’s lagging sales. Many felt PetSmart could easily improve its market share by devoting more resources to its online platforms that had been largely ignored.

8. Georgia-Pacific LLC

Famous for making Dixie cups and Brawny paper towels, Georgia-Pacific was taken over by Koch Industries in 2005 in a deal worth $21 billion. David Koch and his brother Charles are famous for being two of the richest people in America and for their sizable contributions to conservative causes.

Together, they ran the family-controlled conglomerate with a wide range of dealings in everything from energy, commodities, pulp and paper, chemicals, ranching, securities, and finance. This deal is famous for helping Koch industries become the nation’s largest privately held company. David Koch retired from the company in June 2018 because of his failing health. He died in August 2019.

9. Harrah’s Entertainment

They say the house never loses, but the 2006 acquisition of Harrah’s, the world’s largest casino company, is famous for bucking that trend. Not long after the $31 billion leveraged buyout took place, the housing market collapsed and the tourism industry slumped.

After changing its name to Caesars Entertainment, the company withdrew its filing for an IPO in 2010 and lost $831 million that year. In 2015, the legendary gambling empire filed for Chapter 11 bankruptcy.

10. First Data Corporation

In 2007, buyout firm Kohlberg Kravis Roberts & Co. acquired the credit card processing giant First Data for $29 billion. The deal looked to be a disaster soon after it was completed due to the financial crisis, but First Data hung on and is one of KKR’s only surviving precrisis acquisitions.

In 2015, First Data began a comeback by selling apps and big data services to small businesses leading up to its official IPO. First Data’s story is one of the few success stories from the boom of leveraged buyouts.

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  2. Reuters. "Private Equity Buys TXU in Record Deal."

  3. The Dallas Morning News. "Energy Future Enters Bankruptcy, Propose Break-up."

  4. Berkshire Hathaway Inc. "2013 Shareholder Letter," Page 17.

  5. Bloomberg. "Blackstone's $26 Billion Hilton Deal: The Best Leveraged Buyout Ever."

  6. Reuters. "Blackstone to End its Stay at Hilton after 11 Years."

  7. Thomas H. Lee Partners. "Clear Channel Communications, Inc. Enters into Merger Agreement with Private Equity Group Co-Led By Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P."

  8. NBC News. "Clear Channel, Lenders Resolve Dispute."

  9. iHeartMedia. "Clear Channel Becomes iHeartMedia."

  10. Fortune. "Rich Kinder's Bigger Slice."

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  12. CNN Money. "Buyout firm KKR to list on NYSE."

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  14. Reuters. "Freescale Shares Rise in NYSE Debut."

  15. Reuters. "BC Partners to Acquire PetSmart for $8.7 Billion."

  16. Blueshift Research. "PetSmart Sales Not Rebounding Enough; Online Competition Increasing," Page 1.

  17. Koch Industries. "Koch Industries to Acquire Georgia-Pacific for $48 per Share in Cash."

  18. The New York Times. "Koch Industries and Georgia-Pacific May Be a Perfect Fit."

  19. Koch Industries. "Celebrating David Koch's Life and Legacy."

  20. Reuters. "Update 1-Paulson Moves ahead with Harrah's Share Sale."

  21. Caesars Entertainment Corporation. "2010 Form 10-K," Page 59.

  22. Reuters. "Timeline: Key Moments in the Contentious Caesars Bankruptcy."

  23. Pitchbook. "With $22B Fintech Merger, KKR Avoids Another Disastrous Pre-Crisis Mega-Deal."

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