bloggingbuyouts

When The Blackstone Group (NYSE: BX) went public, many observers -- myself included -- were concerned by the total lack of corporate governance checks and balances.

But at the time, the private equity industry was so hot that Blackstone could do no wrong, and no one cared enough to complain. Now that KKR is mulling a plan to list on the New York Stock Exchange, things could be different. The wheels have come off the industry, at least for now, and the arrogant attitude of "We'll tell you what we feel like telling you and you'll like it" may not play so well.

Many of the bit players are being flushed out of private equity by the tight credit market, and Fidelity Investments, which will close its private equity division next month, is no exception. While buyouts have never been a significant part of the company's business, the firm was managing $500 million as part of an operation that was founded two years ago -- at or near the height of the private equity boom.

Fidelity's private equity arm has investments in four companies, but spokeswoman Ann Crowley told The Wall Street Journal (subscription required) that "Basically debt financing is largely unavailable because of the economic conditions of the last several months."

Blackstone Group co-founder Peter Peterson has elected to donate $1 billion -- which he calls the "vast majority" of his "net proceeds" from the company -- to his very own Peter G. Peterson Foundation. The foundation's mission statement on its website reads:

Our mission is to increase public awareness of the nature and urgency of key economic challenges threatening America's future and accelerate action on them. To meet these challenges successfully, we work to bring Americans together to find sensible, sustainable solutions that transcend age, party lines and ideological divides in order to achieve real results.

With a market capitalization of $82 million, a $300 million buyout price would be a lot to pay for Playboy Enterprises (NYSE: PLA). But The New York Post reports that's the price the company is looking for as it quietly shops for a private equity firm interested in the flailing icon.

Keith J. Kelly reports that "Sources said the sellers are looking for far more than the company's market capitalization because that would ensure Hef has enough on hand to maintain his lavish lifestyle."

Not so long ago, the formula for activist investing was simple: Buy a 5% stake and file a 13-D, blasting the company's management for its poor performance and excess compensation. Raise hell until they put the company up for sale and a private equity firm takes advantage of the company's low stock price. Then cash out, having made yourself and your fellow shareholders rich. What if the company headed into the toilet after it was taken private? Not your problem.

Those days are long gone. With the private equity business the quietest it's been in a long time, there are no third parties ready to scoop up bargain-priced stocks after activist shareholders push them to the auction block. Increasingly, activist shareholders are having to stick around for the long-term, pushing for improved corporate governance and better management as a way to increase returns.

The first three months of 2009 were absolutely brutal for venture capital, with clean energy leading the way with a decline of 87% compared to the same period in 2008.

Overall, United States venture capital investments fell 61% to $3 billion in the first quarter -- the lowest level in 12 years, according to the National Venture Capital Association.

Just as foreclosures account for a record share of the real estate market, foreclosed companies are also one of the few areas of activity in the private equity space.

Sun Capital Partners took Stila Cosmetics private back in 2006, but defaulted on loans from Wachovia and CIT Group (NYSE: CIT) -- leading those lenders to foreclose on the company.

Apollo Management acquired Realogy -- the parent company of real estate brokerages like Century 21 and Coldwell Banker -- at precisely the top of the real estate bubble.

So far the results have been about what you might expect. Now Apollo is pumping another $150 million in (subscription required) to keep the deal afloat through 2009. The company says that combined with the big cost cuts it's implemented over the past three years will be enough to save the company. Investors disagree, with some of the bonds trading for as little as 11.5 cents on the dollar suggesting a high probability of bankruptcy.

2008 was one of the worst years for private equity deal volume in awhile -- an abrupt end to the boom years marked by the high-profile bankruptcies of companies like Linens n' Things.

But that could be changing: sort of. The number of bad deals of the past few years has led to a growth in "loan to own" deals: vulture private equity firms that lend money to companies struggling under the weight of earlier buyouts with the goal of gaining control over the equity.

The Wall Street Journal reports (subscription required) that buyout flops like Real Mex Restaurants and Bally Fitness are finding themselves under the ownership of new private equity firms after the original deals go south.

But 2009 could also represent a comeback for private equity in the traditional sense if credit markets loosen up. Interest rates are at historic lows and the stock market has taken a pounding leaving a number of profitable companies trading at valuations that make them extremely attractive takeover targets.

If the credit markets return to normal levels of activity, private equity could be a major catalyst for the market's rebound over the next few years by taking private many of the undervalued companies that are driving the market down.

Not much more than a year ago, private equity firms were the masters of the universe. Graduates of the top business schools who once wouldn't have dreamed of anything other than investments banking were beating down their doors for a chance at seven-figure bonuses.

Now the private equity bubble -- along with the housing and credit ones -- is deflating. A new report from Heinrich Liechtenstein, a professor at Spain's IESE Business School, and Heino Meerkatt, a Munich-based senior partner and private-equity expert at Boston Consulting Group predicts that a astonishing 20-40% of private equity firms will go under. Thirty percent will survive and have a shot at prospering over the long-term. The remaining 30-50% will "hang in the balance" -- not shuttering just yet but not exactly the influence-peddlers they once were.

The role that private equity firms have played in the stock market over the past few years has been hugely important. By making bids for undervalued companies, buyout shops provided activist investors with an outlet for activating value at companies that had underperformed. Without the benefit of private equity firms, activist hedge funds will have a new challenge: Can they create alpha through more long-term oriented approaches like management changes, seats on the board of directors, and operational insight? It will be interesting to watch.

One of the most common complaints about private equity companies (and activist investors, corporate raiders, etc.) is that their relentless focus on making a quick profit results in the looting of companies, job losses, and so on.

That theory will be tested in court: Mervyn's LLC has sued its former private-equity owners -- including Cerberus and Sun Capital -- alleging that their profiteering tactics led to the chain's bankruptcy. When the $1.26 billion deal was consummated in 2004, The Wall Street Journal reports that (subscription required) "the deal was structured as two separate transactions -- one for the retailer and a second one for the retailer's real estate. This complicated structure, the suit alleges, enriched the private-equity firms while leaving the retail operations insolvent."

The firms then sold off real estate, paid themselves dividends, jacked up lease payments, and essentially transferred value from the chain to the private equity buyers, according to the lawsuit.

This will be a must-follow case -- assuming it isn't settled quickly and confidentially -- for those looking to understand the larger effects of buyout shops. I'm skeptical of the notion that private equity firms destroy companies and if that was indeed the case with Mervyn's, it may have been a result of the complex structure and self-dealing.

In most cases however, there is little money to be made bankrupting something for which you pay hundreds of millions -- or billions.

Famed studio MGM, which is owned by a bunch of companies including Texas Pacific Group, Providence Equity Partners, Sony (NYSE: SNE) and Comcast (NYSE: CMCSA), is considering a public offering as it looks to deal with its $3.1 billion debt load. The company has hired Goldman Sachs (NYSE: GS) to explore options for a way out of the 2005 buyout that left the company over-leveraged.

Studios have slowed production because of the credit crunch that is making financing films harder than it's been in a long time.

Other possible alternatives include a bond offering or some other form of debt refinancing, but the company says it's not for sale, although it remains coy on that topic, saying that that "there is no 'asking price' for the company."

Is that a veiled invitation for bids? Sounds like it. But in this environment, there might not be many takers. Time Warner (NYSE: TWX) made an unsuccessful bid back in 2004, but most the other interested parties ended up walking away with various sized stakes in the company.

Steve & Barry's, the college town clothier known for selling reasonably good quality clothing for under $10, will live to fight another day.

The Wall Street Journal reports (subscription required) that Bay Harbour Management LC will purchase the company's assets out of bankruptcy for $168 million, and has been negotiating "around the clock" to secure lease concessions from landlord, with the goal of keeping about 150 of the company's 276 stores operating.

"Value is king today," Bay Harbour managing principal Douglas Teitlebaum told the Journal. "The customer still wants to shop but they must get value, and this company offers better value than I've seen anywhere."

I think he's absolutely right. The company expanded far too aggressively, but its same store sales growth was strong, and its value proposition appears to resonate strongly with consumers. The continued operation of the stores will be a victory for college students all over the country who rely on the chain to dress well on a budget.

Heelys (NASDAQ: HLYS) has looked interesting to me for the past few months. Sure, it's a fad product that's way past its prime but look at the balance sheet: the stock is trading very close to its book value and the company has $96 million in cash, compared with a market cap of just over $130 million. The company has no debt.

Apparently Skechers (NASDAQ: SKX) sees some value here too. In a press release issued after the close of the market yesterday, Skechers announced that, on May 28th of this year, it had made a formal proposal to acquire Heelys. The proposal was rejected without being disclosed to shareholders, and now Skechers is taking the battle to the streets, offering to acquire the entire company for $5.25 per share, a premium of just 8.2% to Tuesday's closing price.

Shares of Heelys traded up to $5.35 after-hours, indicating that investors anticipate that Skechers -- or someone else -- may come through with a more compelling offer.

From a corporate governance and transparency perspective, I think it's disappointing that Heelys didn't disclose the original offer to its shareholders. But given the state of the economy, and its beaten down share price, Heelys can probably make a strong case for staying the course as a stand-alone company, at least for now. If Skechers really wants Heelys, it will up the offer -- the company has to realize that a premium of 8.2% is just not very compelling.

Given the interest in Heelys, you also have to wonder whether fellow fallen angel of footwear fads Crocs (NASDAQ: CROX) could also end up in play soon.

With most observers predicting that it was headed for liquidation, bankrupt discount clothier Steve & Barry's has found a buyer, according to The Wall Street Journal (subscription required).

The company has agreed to be acquired by turnaround firm Bay Harbour Management for $163 million, with Bay Harbour planning to operate the company as a going concern, contingent upon the ability to renegotiate leases with malls that house the company's stores.

But it's a little more complicated than that. Bay Harbour is the stalking horse bidder, which means that, assuming the deal secures bankruptcy court approval, the $163 million offer will serve as opening bid for an auction of the company's assets. If no one else steps forward with a high offer -- or one that is somehow better -- Bay Harbour will have its prize.

This is obviously fantastic news for the company's employees, suppliers and other affiliates, but in a larger sense, it's wonderful for the young people who rely on its 276 store for reasonably fashionable and fabulously affordable clothing -- like NBA-star endorsed basketball shoes for under $10!

I've followed the sage of this company's demise closely, hoping that it would pull through because of all the money it saves college students. While there's still plenty that could go wrong, it's looking more likely that Steve & Barry's will pull through than it has in more than a month.