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Private equity not gone yet

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NEW YORK (CNNMoney.com) -- Private-equity firms, the so-called barbarians of Wall Street, are famous for scooping up downtrodden firms, cleaning them up and then selling for a huge profit.

But it looks like the good old days are over. In the wake of the credit crunch, private-equity firms are finding it much tougher to make a killing.

Witness what's going on today with Alltel. The nation's fifth-largest wireless firm was scooped up for $27.5 billion last November by TPG Capital and GS Capital, the private-equity arm of Goldman Sachs (GS, Fortune 500).

Now the firms are unloading Alltel on Verizon Wireless, jointly owned by Verizon (VZ, Fortune 500) and Vodafone (VOD) - but for just $28.1 billion, a puny premium of 2%.

According to a source close to the situation though, Verizon approached the private-equity investors about the deal about a sale (not the other way around.)

And the return for the sellers is actually closer to 28% if you exclude the debt. Verizon is paying $5.9 billion for Alltel's equity while the private-equity buyers paid $4.6 billion for Alltel's stock.

Still, by private-equity standards, that's nothing. Remember, Thomas H. Lee Partners bought Snapple in 1992 for $135 million and flipped it two years later to Quaker Oats for $1.7 billion. (Lee looked even smarter when Quaker had to ultimately sell Snapple to Triarc for just $300 million.)

Private-equity firms that did big deals last year are now faced with the prospect of dealing with the huge debt loads they used to finance the transactions.

With that in mind, there could be more big private-equity sales of the past few years that may quickly get undone.

"There is always a market for value so more strategic deals like Verizon's for Alltel will continue to take place," said David Gurwin, chair of the entertainment and media law group and the technology transactions group at law firm Buchanan Ingersoll & Rooney. "It's hard to tell just yet but it's possible private-equity firms may feel more pressure to sell. This was not a typical private-equity quick flip."

Other say the upcoming presidential election may also spark a flurry of deals.

Scott Glasser, managing director with ClearBridge Advisors, a subsidiary of Legg Mason, said at a Legg Mason luncheon in New York Wednesday that he thinks there is a strong likelihood that corporate taxes may increase following the presidential election, especially if Obama wins. Firms may want to unload companies in advance of that.

An Obama victory also could lead to a tougher stance on antitrust issues. As a result, Glasser said he thinks there could "be a surge in mergers and acquisitions in order to get under the wire of doing deals."

So strategic buyers, i.e. public companies that couldn't afford to compete with private-equity for assets in 2006 and 2007 may suddenly find that the private-equity shops have plenty of companies they are looking to sell to avoid being further crushed by the massive debt they took on.

That's good news for cash-rich companies looking to take advantage of this market and economic downturn to expand their business. It's not so encouraging for those private-equity shops that overextended themselves.

But few are probably shedding tears for the barbarians. Somebody pass the Snapple.

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