Posted Jul 30th 2008 10:30AM by Tom Taulli Filed under: Deals
Lately, there's been lots of dire talk about the private equity world. Returns are likely to be much lower and perhaps there will be many firms that shut down.
Indeed, such things may turn out to be true.
However, whenever there is extreme turbulence and a pervasive credit crunch, there are also big opportunities to make money. Just look at Apollo Management and Cerberus Capital. Both firms made a killing during the difficult early 1990s.
Fast forward to today, and we may be seeing something similar with one of the top beneficiaries possibly being Lone Star Funds. Yes, this week the fund purchased a collateralized debt portfolio from Merrill Lynch & Co. (NYSE: MER) at 22 cents on the dollar [subscription required]. The face value on it? About $30.6 billion.
This is not a one-off deal as it looks like Lone Star is hungry for high-risk debt. For example, the firm recently purchased the mortgage division of CIT Group Inc. (NYSE: CIT) and acquired Bear Stearn's mortgage segment. There was also the purchase of Accredited Home Lenders Holding Co. for $295 million.
For deals of $2 billion or less, private equity firms are showing interest. However, the problem is cheap valuations.
This is what the board at Chemtura (NYSE: CEM) found out the hard way. Late last year, the company retained Merrill Lynch (NYSE: MER) to explore "strategic alternatives." While some private equity firms showed interest – like Blackstone Group LP (NYSE: BX) and Apollo Management LP -- there wasn't much appetite to pay a premium. So, Chemtura has ended the process. Instead, the company will focus on restructuring, such as divestitures.
Chemtura has an interesting mix of businesses, such as plastic additives, pool and spa products and the lubricant components. For 2007, the company generated $3.7 billion in revenues.
However, with the energy crisis, the environment has been particularly tough for Chemtura. Just look at rival Dow Chemical (NYSE: DOW), which has increased prices two times during the past month.
The Blackstone Group L.P. (NYSE: BX) has just announced that Laurence Tosi will become the new Chief Financial Officer for the private equity giant. He comes to the company from Merrill Lynch & Co. (NYSE: MER) where he served as Chief Operating Officer for the Global Markets and Investment Banking Group. He will also serve on the executive committee and is expected to take up this position "after the summer."
Blackstone also noted that Michael Puglisi, the current CFO, will remain on board as a senior managing director and will remain a member of senior management while he will take leadership of other firm matters and special projects for Stephen Schwarzman.
Back in the 1980s, David Bonderman was the chief dealmaker for Robert Bass, a Texan billionaire. He helped to structure the $550 million buyout of American Savings and Loan Association of California, which was caught in the S&L morass. It was a complex deal, requiring lots of negotiations with federal regulators. But it ultimately turned out to be a great investment. In fact, the bank became a vehicle to finance other deals.
Well, Bonderman is coming back to the future. Now, as the chief of TPG, he's one of the top players in private equity. And he wants to do some finance deals. To this end, he's raising $7 billion for a financial service fund. The investments will range from minority stakes to control situations.
Actually, Bonderman has already been busy with bank deals. For example, he recently assembled the $7 billion equity infusion for Washington Mutual (NYSE: WM). He also approached Merrill Lynch (NYSE: MER) to do an investment, which, so far, hasn't gone anywhere.
Yet, there are many financial institutions that need cash. Moreover, having TPG as a partner is usually a good thing.
As should be no surprise, it looks like TPG is getting traction on the capital raise, with commitments from the New Jersey State Investment Council and the government of Singapore.
Cumulus Media Inc. (NASDAQ: CMLS) has announced that the management-led investor group has terminated the planned merger agreement. While there was a glimmer of hope that this was going to be rekindled, the deal spread on this was so wide that a fleet of trucks could have driven between it.
Cumulus has agreed with the investor group led by Lew Dickey, its Chairman, President and CEO, and an affiliate of Merrill Lynch's (NYSE: MER) Global Private Equity, to terminate the merger agreement which first came on July 23, 2007. The members of the investor group informed Cumulus that after exploring possible alternatives they were unable to agree on terms on which they could proceed with the buyout.
As a result of the termination of the merger agreement, the investor group has agreed to promptly pay Cumulus a merger termination fee of $15 million. In addition, the terms of the previously announced amendment to Cumulus' existing credit agreement will not take effect. Cumulus had a market cap of $253.6 million based upon a $5.81 close on Friday.
The company has also announced that its board of directors intends to explore the possible implementation of a new stock repurchase plan in the near-term in order to provide liquidity opportunities to stockholders.
After Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER) reported earnings, there was at least some hope that the worst was behind the banking and brokerage industries. But that may not be true. Over the weekend Royal Bank of Scotland (NYSE: RBS) said it might have to raise $12 billion. Then there is today's news from big Midwestern bank National City Corp. (NYSE: NCC).
NCC will probably announce that it has raised over $6 billion. According to The Wall Street Journal, "the Cleveland-based regional bank was hammering out final terms of the transaction with a group of investors led by Corsair Capital LLC, a New York private-equity group."
Current NCC stockholders will be beaten to death. The new capital will come in at $5 a share. The stock trades at over $8 now. NCC's 52-week high is over $38.
The news is another example of how management at banks doomed their shareholders. Financial companies took on huge amounts of subprime-backed paper. The investments looked safe, but, on closer examination, they carried great risks if the housing market began to falter. The underlying assumption was that home prices would move up forever and that mortgages had been granted to consumers at reasonable rates. Both of those assumptions were wrong.
When something looks too good to be true, it usually is.
Douglas A. McIntyre is an editor at 247wallst.com.
If you look over "at-risk" mergers, the acquisition of Myers Industries, Inc. (NYSE: MYE) looked about as hopeful as waiting for the Titanic to pull into port. This merger was announced almost one-year ago as a $1.1billion deal, and the market cap is $478 million.
The company has announced this morning that it has received notice that GS Capital Partners, the private equity arm of Goldman Sachs (NYSE: GS), does not intend to proceed with the proposed acquisition of Myers. As a result, Myers Holdings and GS Capital have mutually agreed to terminate their merger agreement, with an effective date of April 3, 2008.
After looking back over its past earnings release, it appears that raw materials costs are probably part of the problem for the rubber and plastics maker. Myers had also received a $35 million payment from GS Capital Partners to extend the merger date to April 30.
Myers Industries continues to focus on its sound business growth plan and fundamentals directed at sustainable, profitable growth. The company noted it "is confident in its ability to continue value generation for customers and shareholders."
The buyout price was originally set at $22.50, and shares closed on Thursday at $13.60. The 52-week trading range was $9.73 to $22.73, so this one was fairly well telegraphed that it was a goner. About the only hope here was that a lower buyout would come. Hoping in the same sentence as investing is generally one of the worst investment policies out there.
Cumulus Media Inc. (NASDAQ: CMLS) has an SEC FILING this morning noting that the company has received necessary consent from the lender group under its existing credit agreement that would allow it to enter into an amendment to permit a merger. It had previously noted on March 5, 2008 that it had entered discussions with lenders.
Members of the lending group holding in excess of 50% of the debt required to enter into an amendment gave their consents. The management-led merger would be with an investment group led by its Chairman, President & CEO Lewis W. Dickey Jr. and an affiliate of Merrill Lynch Global Private Equity, part of Merrill Lynch (NYSE: MER).
This is not a done deal yet as merger completion remains subject to various conditions. Some conditions include approval by shareholders, FCC approval, and other customary closing conditions. The original buyout price was $11.75. On last look, shares were up more than 12% at $5.51, and the 52-week trading range is $4.90 to $11.74.
This has been one of the longer standing mergers as it was announced back in July 2007 right at the peak of the world being awash in liquidity and the height of private equity deals. On last look, the company had roughly 345 radio stations in 67 U.S. markets. Its market cap as of today is $238 million.
There's been a lot of talk about investments by sovereign wealth funds in the U.S. Some of the headline-grabbing deals have not worked out very well for the foreign buyers, at least in the short run. Abu Dhabi's investment in Citigroup (NYSE: C) a few weeks ago has been a loser so far, and it doesn't look any better for investment by various sovereign wealth funds in Merrill Lynch (NYSE: MER).
Many analysts are worried that the sale of chunks of U.S. corporations will hurt the country. Peter Cohan of BloggingStocks recently wrote that he is worried that "that the U.S. economy is at risk if these foreign investors use the power of their capital to sway U.S. policy in a way that weakens us politically or economically." This echoes widespread anxiety about American being 'for sale.'
In an interview with the The New York Times, famed banker Felix Rohatyn argues that the real driving force behind investments by sovereign wealth funds in the U.S. is indeed political. Short term economic results are secondary to questions of power and policy. While many of these investments will likely make sense economically in the long run, the real benefit for foreign investors is the growing power of their governments in determining the course of the global economy.
This increase in power of foreign governments frightens many Americans. And it's true that many of the foreign funds are owned by countries that could come into conflict with the U.S., including China and Russia, though probably not Norway and Singapore (click here for a list of the largest funds). But it's not clear that this will be a loss for the global economy, or even for the U.S. Much of the current market turmoil is driven by poor decisions by American bankers, and it's possible that outside influence could improve the performance of American banks. And since most of the large sovereign funds hold petrodollars -- the largest, in Abu Dhabi, holds $1.3 trillion -- it stands to reason that these investors want the same thing as American investors: solvent banks and a healthy economy that can keep those petrodollars moving.
In a move that may represent a victory of hope over reason, Davis Selected Advisers has disclosed that it now owns 5.1% of MBIA, Inc. (NYSE: MBI).
On paper, the stock does look cheap, and Davis could claim to be something of an expert on financial shares having just put money into Merrill Lynch & Co., Inc. (NYSE: MER). But, Merrill is almost certainly the safer bet. Its business is spread across a number of sectors of the industry, from retail brokerage to mergers and acquisitions work. MBIA is a bond insurer in a dangerous bond market. And, it is a company which faces potentially ruinous downgrades from major credit agencies.
According toTheStreet.com, "Fitch said MBIA needed to shore up $1 billion in capital in the next four to six weeks to avoid a downgrade. That's on top of the $1 billion investment from the private-equity firm Warburg Pincus that MBIA secured earlier this month." If mortgage-related securities write-offs continue at big banks and investment houses that $1 billion may be hard to come by, or, it could represent significant dilution for MBIA's current shareholders. The firm's market cap is already below $3 billion.
The Davis investment looks like a loser, at least in the short term. MBIA shares are down by two-thirds from their 52-week high. A downgrade of its "AAA" rating by a bond agency would seem possible, if not probably.
Davis may have to sit on its MBIA shares for a very long time.
Douglas A. McIntyre is an editor at 247wallst.com.
The deal is expected to be completed during the first quarter of 2008, and will add an estimated $10 billion plus in assets to GE Capital. Merrill has been hit pretty hard this year with the subprime mortgage mess, and this deal will result in around $1.3 billion worth of capital that the company will be able to allocate elsewhere.
Merrill, which announced a massive $8.4 billion worth of write-downs back in October is in the middle of what it is calling a "strategic focus on divesting non-core assets." This sale is beneficial to Merrill because the firm's commercial-lending business has become reliant on companies that do not posses investment-grade credit ratings and pose a financial risk that Merrill does not need to be assuming, especially after Merrill's recent write-down.
Early this year, it looked like we'd see a flood of IPOs for hedge funds and private equity funds. But with the credit crunch -- and extreme market volatility -- this prediction looks like a bust.
Well, FT.com has a story that has some interesting buzz: Renaissance Technologies is thinking of selling a stake to outside investors. This hedge fund manages about $30 billion and has one of the world's brightest investors at the helm, James Simons.
FT.com says that Renaissance will not use a public offering; instead, it will do a private offering to institutions and wealthy investors. The system is known as Opus 5 and is a joint venture among the Bank of New York Mellon (NYSE: BK) Citigroup (NYSE: C), Lehman Brothers (NYSE: LEH), and Merrill Lynch (NYSE: MER)
In light of the awful public offerings of alternative investment firms, such as Blackstone (NYSE: BX) and Fortress Investment Group (NYSE: FIG), I think the private option makes sense.
But, with the uncertainty in the market, it seems like bad timing. Maybe wait just a little while until the dust settles?
You know the feeling. You've done a lot of shopping -- and used your credit card heavily. It's so easy, right? Of course, until the heavy interest payments pile up.
Simply put, that has been the story for big-time financiers, such as Goldman Sachs (NYSE: GS), Lehman Brothers (NYSE: LEH), Merrill Lynch (NYSE: MER), Citigroup (NYSE: C), JP Morgan (NYSE: JPM) and so on. They kept committing their balance sheets to provide loans to buy up companies. And, of course, private equity funds -- like KKR, TPG, Apollo, and Blackstone (NYSE: BX) -- were ready, willing, and able to take the largesse.
But now the bill is coming due.
Well, in this week's Barron's [a paid publication], there's an excellent story on this topic. In fact, the lenders were so eager to make these mega loans that they were loosey-goosey on the terms. For example, some loans even allowed for deferring debt payments (perhaps the subprime market was not the only crazy place, huh?)
Oh, the lenders also were willing to forgo escape clauses in loan agreements. Hey, wouldn't the gravy train last forever?
So what happens to the hundreds of billions in buyout debt? Barron's thinks that the lenders will sell the stuff at deep discounts. True, this will mean significant losses. But, if things are bad, might as well get everything written down now and then pave the way for a better future, right? Although, I have a feeling banks are going to be a little more circumspect when it comes to new buyout loans.
General Motor's (NYSE: GM) sale of its Allison transmission unit shows that risky debt is getting harder to come by. Private equity investors buying the unit for $5.6 billion are delaying the sale of bonds due to lack of interest.
According toThe Wall Street Journal [subscription]: "The deal is being financed by $3.5 billion in corporate loans and another $1.1 billion worth of junk bonds." Lehman Brothers (NYSE: LEH), Citigroup (NYSE: C), and Merrill Lynch (NYSE: MER) were planning to sell the bonds to institutional investors. So far, the demand has not been there.
If the investment houses cannot sell the bonds, they will have to hold the debt themselves.
As Wall St. does more and more high risk/junk debt deals and investment banks take on more risk financing the deals themselves, investors should be worried about the future consequences. If savvy institutions do not want the debt, why would it be prudent for the bankers to keep it? For deals already in the pipeline they have an obligation, but that will probably mean that their appetites will disappear soon.
And that means that the next deal that looks like Allison won't get done.
Earlier this week, papers filed with the SEC showed that a group of investors have purchased a 9.5% stake in Steak n Shake (NYSE: SNS). Steak n Shake is a major American restaurant chain, with nearly 500 locations throughout the Midwest and southern US.
The SEC documents indicate that HBK Management LLC leads a group of investors who have paid $412 million for 2.7 million shares of the company. HBK, based in Dallas, Texas, manages roughly $13 billion in equity capital, making it one of the larger private investment funds. The firm is named after Harlan B. Korenvaes, former managing director of Merrill Lynch & Co. (NYSE: MER). He founded HBK in 1991, starting with $30 million in capital.
Steak n Shake shares surged on news of the investment. Share prices had fallen in May with the company's announcement of reduced guidance for 2007 earnings, and were trading in the $15 range before the new investment. Shares have rebounded to the $17 level, up roughly 15%.
Steak n Shake is headquartered in Indianapolis. It offers a hybrid of fast food and restaurant dining, with made-to-order hamburgers, real silverware, and milkshakes that actually contain milk. The investors say they have no plans to take control of the company, but rather seek to develop new strategies to improve the company's performance.
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Lately, there's been lots of dire talk about the private equity world. Returns are likely to be much lower and perhaps there will be many firms that shut down.
For deals of $2 billion or less, private equity firms are showing interest. However, the problem is cheap valuations.
and 
. He also operates 
Back in the 1980s, David Bonderman was the chief dealmaker for Robert Bass, a Texan billionaire. He helped to structure the $550 million buyout of American Savings and Loan Association of California, which was caught in the S&L morass. It was a complex deal, requiring lots of negotiations with federal regulators. But it ultimately turned out to be a great investment. In fact, the bank became a vehicle to finance other deals.
Early this year, it looked like we'd see a flood of IPOs for hedge funds and private equity funds. But with the credit crunch -- and extreme market volatility -- this prediction looks like a bust.
Earlier this week, papers filed with the SEC showed that a group of investors have purchased a 9.5% stake in 
