Dealmaking stayed low key in August, but Pipelines are full.

LOCAL mergers and acquisitions remained in summer doldrums in August, with only 67 deals worth an estimated $4.4 billion, according to data compiled for the Business Journal by Minneapolis-based investment firm Goldsmith Agio Helms.

That's down from July's 81 deals worth $4.7 billion and way off the torrid megadeal pace for June with its $20 billion in transactions. It's even slightly below the August 2005 level of 75 deals worth an estimated $4.7 billion.

Of course, such slowing is typical in summertime, when dealmakers go on vacation. And these comparatively low numbers may be masking a more robust deal climate beneath the surface that could reassert itself as the year draws to a close.

"Our deal pipeline is as large as it's ever been," said Ed Villeneuve, managing director at Goldsmith Agio Helms. "We expect the pace of announced deals to pick up as we head into 2007."

Historically low interest rates and loads of private equity dollars looking for companies in which to invest are driving this deal climate.

What's more, in recent months, a new trend has shown up, one that is not represented in the announced deal numbers: dividend recapitalizations. Essentially, this is a form of cashing out, akin to a home mortgage refinancing. It involves obtaining additional debt from a bank and then drawing on that debt to pay dividends. Then, the debt is repaid from continuing growth at the company--or at least that's the plan.

"You don't actually sell the company, but you're able to draw out proceeds from the company as if you sold it," said Lloyd Greif, president and chief executive of Greif & Co., an L.A.-based investment bank specializing in mergers and acquisitions. Because the company itself doesn't change hands, dividend recapitalizations are not recorded in typical merger and acquisitions data.

Of course, while corporate growth is strong, this scheme works beautifully. But the moment growth slows or the economy falters, things can turn upside-down in a hurry. That's now a rising concern on Wall Street as predictions mount for an economic slowdown for the end of 2006 and early 2007. The downturn would be driven in large part by slowing in consumer spending.

"The big risk is that you can end up with additional debt without the cash from operations to repay it," Greif said.

Consumer, food products hot

So far, though, consumer spending has remained strong, and that's driven interest in deals involving retail products. Indeed, the largest local deal in August involved Boston-based private equity firm Berkshire Partners LLC and Los Angeles-based investment firm Freeman Spogli & Co. paying $1.2 billion for Dulles. Va.-based N.E.W. Customer Service Cos. Inc., which provides extended service plans for consumer products.

Another big consumer-oriented deal occurred when Boca Raton, Fla.-based Sun Capital Partners bought up Real Mex Restaurants of Cypress, with the $400 million deal negotiated out of Sun Capital's West Los Angeles offices. The Real Mex chain includes such local icons as El Torito and Acapulco Mexican Restaurants.

This deal follows another major private equity investment in a restaurant chain: Late last year, L.A.-based investment group Leonard Green & Partners paid between $200 million and $250 million for the Claim Jumper restaurant chain.

Meanwhile, as oil prices reached record highs earlier this summer, another major deal was the purchase by Westwood-based Occidental Petroleum Corp., the nation's fourth largest oil company by market value, of the California and Texas assets of Houston-based Plains Exploration & Production Co. for $865 million.

Noticeably lacking on the August list of major deals was anything involving real estate or construction. That sector has headed into a downturn as the housing boom has ground to a halt.

Some smaller deals are still going, through.

"We expect people to grow even more cautious about building products and housing companies as we head into 2007," Villeneuve said.

By HOWARD FINE

Staff Reporter

M&A Update
Announced mergers and acquisitions in L.A. County.

Month             Deals   Deal Value

October           72      $6.5 billion
November          66       9.2 billion
December          73      19.6 billion
January '06       60      16.0 billion
February          64       4.0 billion
March             67      12.2 billion
April             65       5.9 billion
May               88      10.9 billion
June              84        20 billion
July              81       4.7 billion
August            67       4.4 billion

Source: Goldsmith Agio Helms