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Bausch & Lomb 'Success' Less Than Meets the Eye

Stocks in this article: VRX GS HCA APO KKR I

Still, Bausch & Lomb's takeover and sale highlights a unique arbitrage for PE firms where they finance takeovers and then spend a handful of years managing a leveraged balance sheet until a buyer emerges willing to assume the company's debt.

While such a strategy led to a near record number of bankruptcies in the credit crunch of 2009, five consecutive years of zero-interest-rate policies promoted by the Federal Reserve has made such an arbitrage highly profitable.

For instance, in the buyout of HCA (HCA), a rare mega deal of the buyout boom years that has worked out for the buyers, the company's market capitalization remains far below its initial purchase price. Currently, HCA's market cap of $17.1 billion is about 20% below its $21.3 billion takeover price in 2006.

Thankfully, firms such as Bain Capital, KKR and the PE arm of Merrill Lynch only had to put up about $5.3 billion to buy HCA and financed the rest of the deal, meaning that even if the company is currently valued in stock markets at well below its takeover price, the risky buyout has already been a coup for investors.

PE firms continue to hold sizeable stakes in HCA. However, they've already made their money back from a series of junk debt fueled special dividends and share sales.

Apollo Global Management, another PE giant, has also booked impressive gains from real estate broker Realogy (RLGY ), although the company's current post-IPO market cap is just marginally higher than its 2007 buyout. Similar trends are likely to hold true for scores of deals such as Intelsat (I ), Alliance Boots and HD Supply as buyout investments come to market in acquisitions and IPO's.

While firms like Warburg Pincus, KKR, Apollo and Bain may be in the midst of realizing three baggers and beyond, don't get fooled by the headlines.

Unlike ordinary investors or even hedge fund activists as prominent as Carl Icahn and Dan Loeb run Third Point they are not in the business of buying low and selling high. With enough leverage, buying high and selling low for cash can also work.

As long as interest rates remain low, expect the industry's fortunes to continue to rise.

Sard Verbinnen, a PR firm representing Warburg Pincus, did not return a voicemail seeking comment.

-- Written by Antoine Gara

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