Bulls Visit LBO-a-Go-Go

A leveraged buyout deal arrived Monday to finally break RJR Nabisco's 1989 record and test the waters for mega-LBOs in the pipeline. Such large, leveraged deals are a looming storm if you're a bond investor worried about all the new debt piling into the market. But for stock investors, the leveraged buyout trend could be your friend.

That was certainly the case Monday, as major averages leaped in reaction to news a group of private equity firms had bid to take hospital company HCA(HCA Quote) private in a deal estimated to be worth approximately $33 billion, including around $11.7 billion in assumed debt. RJR Nabisco went private for a total of $31.3 billion in 1989, including assumed debt. The HCA bidders include Bain Capital, Kohlberg Kravis Roberts and Merrill Lynch Global Private Equity. HCA's shares finished the day up 3.18%.

Investors should expect more mega-deals, as the private equity industry raised more than $200 billion in 2005 and aims to raise an additional $342 billion in 2006, according to a report by Private Equity Intelligence.

"We're operating on the assumption that HCA is probably not the only large transaction on the horizon," says Greg Peters, U.S. credit strategist at Morgan Stanley, who is responsible for the firm's monthly LBO Screen report, which methodically evaluates likely LBO targets.

Thus far this year, a record-setting $201.6 billion in private equity deals have been announced in the U.S., compared with $372.6 billion globally, according to Dealogic.

The trend may be a bullish sign. An LBO boom may support the argument that stocks are fairly priced, if not undervalued, and provide more evidence that balance sheets in corporate America are healthy. The pickup in deal announcements suggests private equity investors are keen on stocks at current levels.