Credit turmoil throws deals in jeopardy

LONDON (CNNMoney.com) -- The market is growing more skeptical that already announced buyout deals will get done, another sign of the growing cloud over private equity.

Several firms that have agreed to takeovers are trading well below their deal prices, including student loan provider Sallie Mae and Texas utility TXU (Charts, Fortune 500).

As the credit markets have seized up, investors appear to be growing uneasy about the ability of buyout firms to complete some of these deals - at least at their original terms.

"You have some questioning of the ability of buyout groups to take out companies. Rising interest rates are making some of these deals unattractive," said Robbert Van Batenburg, head of global research at Louis Capital Markets in New York.

Already there are signs the tightening in credit is taking a toll on some deals. Home Depot (Charts, Fortune 500) said Thursday that the private equity firms buying its supply unit may lower their $10.3 billion price.

The credit crunch has added pressure to deals already in doubt. Speculation that J.C. Flowers could back out of its deal to buy Sallie Mae (Charts, Fortune 500) due to new student loan reforms proposed in Congress has dragged on Sallie. The stock is now trading about 18 percent below its deal price. Sallie Mae said this week the deal remains on track.

The market is also taking a negative view on other deals that might otherwise have been completed with ease. Shares of wireless phone company Alltel (Charts, Fortune 500) are down 7 percent from the $71.50 a share offer TPG (formerly Texas Pacific Group) and Goldman Sachs made for the firm in May.

The market is pricing in the chance that some of these deals get canceled, analysts say, and those odds are growing as the financing machine that has propelled the explosion of buyouts has come to a grinding halt.

"The funding is drying up, nobody wants to be funding these sorts of deals. Some of the really big deals that have previously been on the table could be taken off or at least postponed," said David Karsbol, head of market strategy at Denmark's Saxo Bank.

Since June 22, some $60 billion in corporate bond and loan deals have been pulled from the market, according to investment management firm Baring Asset Management.

The credit squeeze is hitting investors and companies worldwide. Shares of Dutch bank ABN Amro, the target of an intense bidding war for the biggest banking buyout ever, sank as much as 11 percent Friday as investors worried the current turmoil would thwart a deal.

But the turmoil is dealing an especially hard blow to private equity firms because they borrow heavily to do their deals. As the crisis in the U.S. mortgage sector has deepened, big investors have turned away from risky investments, including the complex securities where a lot of the debt for financing leveraged buyouts has been placed.

Market watchers remain divided on how long buyout deals will face financing hurdles. Some say credit markets will stabilize in the next few months, while others say it will take much longer.

What is clear is that while credit markets work through their adjustment, some buyout targets may feel the brunt of the pain.