What is a 'Reverse Leveraged Buyout'

A reverse leveraged buyout occurs during the offering of shares to the public by a company that was taken private during a leveraged buyout. In the leveraged buyout, a private equity firm would have purchased the publicly traded company by borrowing heavily (using leverage) to purchase all the company's stock and using the target's assets as collateral.

BREAKING DOWN 'Reverse Leveraged Buyout'

After the LBO, the private equity firm repackages the company while it is privately owned and can't be as heavily scrutinized by the public. It then offers the company's shares for sale again in an RLBO. A number of academic research studies covering the period from 1980 to 2000 found that shares issued in RLBOs performed well after the IPO.

During a leveraged buyout, high levels of debt often force a business entity to streamline operations, due to a lack of money to be wasted on frivolous expenditures. A successful LBO can often materially correct a flawed business model, as such, it often makes sense for a private entity to return to capital markets to raise needed capital. A private equity firm may also want to exit a successful LBO by executing a reverse leveraged buyout (RLBO).

The performance of reverse leveraged buyout performance is mixed. Most empirical studies show favorable results initially post-RLBO, with returns deteriorating over time which seems reasonable as efficient entities may once again return to wasteful habits after going public.

Example of a Reverse Leveraged Buyout

Hilton Hotels is a good example of a successful reverse LBO: In 2007, Blackstone Group purchased Hilton Hotels for $26 billion in an LBO, financed through $5.5 billion in cash and $20.5 billion in debt. As the financial crisis of 2009 began, Hilton had major problems with declining cash flows and revenues. However, subsequent to that, Hilton was able to refinance itself at lower interest rates, operations improved and Blackstone sold Hilton at a profit of almost $10 billion.

RELATED TERMS
  1. Going Private

    Going private is a transaction or a series of transactions that ...
  2. Club Deal

    A club deal is a private equity buyout or the assumption of a ...
  3. Secondary Buyout

    In a secondary buyout, a financial sponsor or private equity ...
  4. Repackaging

    When a private equity firm takes a public firm private by purchasing ...
  5. Bust-Up Takeover

    A bust-up takeover is a corporate buyout in which the acquirer ...
  6. Leveraged Loan

    Loans extended to companies or individuals that already have ...
Related Articles
  1. Investing

    The Most Famous Leveraged Buyouts

    A look at the largest and most famous leveraged buyouts in history.
  2. Investing

    Understanding Leveraged Buyouts

    LBOs are often presented as predatory by the media, but it really depends on which side of the deal you're on.
  3. Investing

    Effects Of Interest Rate Hikes On Private Equity

    Private Equity firms would be wise to lock in current interest rates on their debt payments in anticipation of rate hikes.
  4. Investing

    Leverage: Is It Good for Your Portfolio?

    Discover the concept of financial leverage. Learn multiple ways to get leverage in your portfolio, and decide if leverage is a good idea for you.
  5. Trading

    How leverage works in the forex market

    Investors use leverage to significantly increase the returns that can be provided on an investment.
  6. Investing

    10 Most Famous Public Companies That Went Private

    Here’s a list of the most popular listed companies that went private in recent decades.
  7. Managing Wealth

    Leveraging Leverage For Bigger Profits

    Leverage is like fire. Find out how to use it to heat up your investing without burning your portfolio.
  8. Trading

    Forex leverage: A double-edged sword

    Find out how leverage, a flexible and customizable tool, magnifies both gains and losses in the forex markets.
  9. Investing

    4 Mistakes to Avoid When Trading Leveraged ETFs

    Learn the common mistakes made with leveraged ETFs, and discover how you can lose money even if you are right on the direction of a market sector.
RELATED FAQS
  1. How are leveraged buyouts financed?

    Understand the basics of a leveraged buyout, who is involved in executing the transaction and some of the various ways to ... Read Answer >>
  2. What is "leverage" as it is used in closed-end funds?

    A distinguishing feature of closed-end funds is their ability to use borrowing as a method to leverage their assets. An ideal ... Read Answer >>
  3. Why Do a Reverse Merger Instead of an IPO?

    Reverse mergers are often the most cost-efficient way for private companies to trade publicly. Read Answer >>
  4. How risky are futures?

    Understand how futures contracts are trading and learn what aspect of futures trading poses potentially greater risk than ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center