KKR, Goldman drop $8bn audio deal

KKR and Goldman Sachs plan to walk away from their previously agreed $8 billion buyout of Harman International Industries, claiming the audio equipment maker has had a material adverse change in its business and breached the agreement. Harman disputes the claims.

Private equity firms Kohlberg Kravis Roberts and Goldman Sachs Capital Partners have informed Harman International Industries that they do not plan to go through with their previously agreed buyout, valued at roughly $8 billion (€6 billion).

The buyout firms said a material adverse change has occurred in the US audio equipment maker’s business, and that the company breached their contract, according to a statement issued by Harman, which disputes the claims.

KKR and GSCP did not immediately return requests for comment.

Invocation of the “material adverse change”, or MAC clause, is very infrequent in today’s buyout environment, said C. Todd Boes, a partner in Ropes & Gray’s corporate department who specialises in transactions including LBOs.

“How you define what a MAC is has been changing in the frothy deal environment we’ve had over the last couple years,” Boes told PEO. “How the MAC clause is phrased has sort of gotten more seller-friendly.”

Generally, a MAC is understood to be applicable only when something very serious and fundamental has occurred to the business in question, and there’s often a proviso that excludes specific events from triggering a MAC, Boes said.

“The point of that proviso being, from a seller’s prospective, if something bad happens to the company but it’s industry-wide and economy-wide”, the buyer is still obligated to complete the transaction, Boes said.

“They can be drafted in more or less precise ways,” he added. But it’s usually a “bet-the-farm level dispute if a buyer is wiling to go the fairly drastic step of invoking a MAC clause” since chances are high the dispute would end up in litigation, and courts have thus far reaffirmed the reason for breaking a buyout agreement must be very serious, Boes said.

“It’s a tough standard to meet,” he said.

Lone Star, a Texas-based private equity firm, recently invoked the MAC clause in its attempt to walk away from a $400 million agreement to buy subprime lender Accredited Home Mortgage. The mortgage company in turn sued the buyout firm to force the sale, which prompted Lone Star to offer to proceed with the buyout at a reduced price. Last week, the two firms inked a $296 million agreement and dropped pending lawsuits.