Yesterday's $11.5 billion debt offering for Energy Future Holdings, formerly known as TXU Inc, proceeded nicely considering the market turmoil of the last few weeks, according to TheDeal.com.
It's still just a small portion of the $36 billion commitment, but the discounts were smaller than expected. This must come as a relief to KKR and Texas Pacific Group, which launched the $44 billion buyout in February.
Does this mean the debt markets are recovering? Perhaps. Meanwhile, there's still a lot of debt to sell.
Leap Wireless(NASDAQ:LEAP) implied volatility Elevated prior to PCS buyout proposal. LEAP, a provider of wireless communications services, is recently up $13.45 to $85.95 in pre-open trading. PCS proposed to acquire LEAP for about $5.27 billion in stock. LEAP total option volume of 801 contracts on 8/31 was below average. LEAP over all option implied volatility of 46 was above its 26-week average of 35 according to Track Data, suggesting larger price risk.
MetroPCS(NYSE:PCS) implied volatility elevated prior to stock bid for LEAP. PCS, a provider of unlimited wireless communications services, proposed to acquire LEAP for about $5.27 billion in stock. PCS option volume was light on 8/31/07 on 327 contractors. PCS over all option implied volatility of 68 is above its 16-week average of 50 according to Track Data, suggesting larger price risk.
TXU Corp(NYSE:TXU) volatility flat as Arbitrage spread tightens. TXU, manager of a portfolio of energy business in Texas, closed at $67.40. KKR & Texas Pacific Group announced in February the acquisition of TXU for $69.25. The deal is expected to close by year end. TXU October option implied volatility of 13 is near its 26-week average according to Track Data, suggesting non-directional risk.
Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Just last week, I addressed some of the pending mergers that are being deemed at risk as far as "WILL THEY CLOSE?" and there are still some pretty large spreads between today's stock prices and the implied merger prices. That merger risk-arb is an area that has made fortunes for many funds, and it has led to many a demise. Here are some of the pending deals covered today so you can see where there is risk and where there is opportunity.
Tribune (NYSE:TRB) is perhaps one of the most frequently referred to deals. This is one that we have speculated will have a price cut. After all, would you loan Sam Zell and this company this much money when the media fundamentals are as bad as they are (and they only get worse)? Shareholders have approved the deal, but that was a given. Tribune's $34.00 buyout price has an implied return of over 20% to today's prices of $28.15, but I think a safe bet is for a lower-than-voted-on price.
First Data Corp. (NYSE:FDC) is the one of the biggest mergers pending that is still at risk. First Data is set to receive $34.00, and shares are currently at $32.51. The good news is that this KKR-led deal is MUCH better in risk-arb terms than it was two weeks ago when shares dipped to under $32.00.
Sallie Mae, or SLM Corp. (NYSE:SLM), is really perceived as being at risk. It isn't just the financing being at risk. The regulatory agencies may want this blocked as it is a quasi-agency status. If you don't think a $60.00 buyout price is a risk when the shares are at $49.05 today, then what can be said? J.C. Flowers & Co., Bank of America Corp.(NYSE:BAC) and JPMorgan Chase & Co.(NYSE:JPM), have said that legislation could kill the deal.
TXU Corp. (NYSE:TXU) is the real biggie, and still up in the air. You have to wonder why Warren Buffett wouldn't have stepped in for his WHALE OF A DEAL, particularly since he has telegraphed that he'd like to own utilities. ISS has recommended that shareholders vote in favor of the buyout.
Jon Ogg is a partner in 24/7 Wall St., LLC; he produces the Special Situation Investing Newsletter and does not own securities in the companies he covers.
For the past few years, things have been nearly perfect for the private equity world. Credit was cheap and public companies were certainly willing to go private.
But, of course, things are much different now. In fact, there is some doubt that mega deals -- such as for TXU Corp. (NYSE: TXU) and SLM Corp. (NYSE: SLM) -- may not get done because of the tough credit environment.
According to anAP report, the TXU Corporation (NYSE: TXU) is working on plans to break into three separate companies. The break up would occur in the event that the buyout led by KKR and TPG cannot be completed.
Plans for the buyout of TXU were announced in February, and the proposed deal is worth an estimated $32 billion. TXU has been on a road show trying to convince investors to approve the deal, which comes up for a vote in early September, and earlier this week TXU commented on its new plans for a possible break up.
TXU shares have been losing value over the last few weeks, down in the $63 range from a high of $67.90 in early July. Investors are getting nervous that the buyout may not get done as credit markets tighten, raising the cost of the massive borrowing that will fuel the deal.
Nothing like seeing billionaires have a hard time. But that's the case with big-time private equity kingpins, like KKR's Henry Kravis.
Despite being the pioneer of the industry, KKR was a bit late to the IPO feeding frenzy, with arch enemy Blackstone (NYSE: BX) snagging the riches.
Interestingly enough, KKR had to report some of the misery in an updated IPO filing (which is the first amended document).
If you look at page 30, you'll find the following:
"For example, the cost of financing leveraged buyout transactions by issuing high-yield debt securities in the public capital markets has recently increased significantly. If conditions in the debt markets do not become more favorable to us in the near term, we may need to rely on financing commitments provided directly by investment banks or other sources in order to consummate pending transactions or finance future transactions. Such financing may be significantly more costly, with terms that may be significantly more restrictive, than financing that was, until recently, available to us in the public capital markets. More costly and restrictive financing may adversely impact the returns of our leveraged buyout transactions and, therefore, adversely affect our results of operations and financial condition. In addition, in the event of a prolonged market downturn, our business could be affected in different ways. Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs within a time frame sufficient to match any decreases in net income relating to changes in market and economic conditions."
Yes, it's a bummer for an upcoming IPO. Just look at the horrendous after-market performance of Blackstone. In fact, despite a strong quarterly report, the stock had a tepid performance today.
And, if KKR does have troubles financing mega deals like TXU (NYSE: TXU) and First Data Corp (NYSE: FDC), we might see the next filing for withdrawal of the public offering. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
CDW Computer Centers (NASDAQ: CDWC) volatility Flat as Arbitrage spread widens. CDWC is recently down 47 cents to $83.31. CDWC, a direct marketer of multi-brand information technology products and services, agreed to be acquired by Madison Dearborn for $7.3 billion cash, or $87.75 on May 30. CDWC September option implied volatility of 9 is near its 10-week average according to Track Data, suggesting flat risk.
TXU Corp (NYSE: TXU) volatility Elevated as Arbitrage spread widens. TXU, manager of a portfolio of energy business in Texas, is recently down $1.57 to $61.96. KKR & Texas Pacific announced in February the acquisition of TXU for $69.25. The deal is expected to close by year's end. TXU October option implied volatility of 30 is above its 23-week average of 13 according to Track Data, suggests large price fluctuation risk.
Nuveen Investments (NYSE: JNC) volatility at 18 into expected Autumn deal close. JNC, a provider of diversified investment services to institutional and high-net-worth investors, is recently down 80 cents to $60.40. Madison Dearborn Partners announced on June 19 the acquisition of JNC for $65 cash. JNC shareholders will meet on September 18 to vote on the proposed acquisition. JNC overall option implied volatility of 17 is near its 7-week average of 15 according to Track Data, suggesting flat risk.
Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Today, I met with a friend who is involved in a business that provides background checks on employees. He said the business is doing well -- except for the Fortune 500 customers. Why? Perhaps these companies are cutting back jobs.
Could that be the result of private equity? After all, with large amounts of capital, private equity firms are targeting mega companies like TXU Corp. (NYSE: TXU) and First Data Corp. (NYSE: FDC). What's more, private equity deals often involve job cuts.
Well, Congress is thinking about these issues and even had a hearing yesterday.
The president of SEIU (Service Employees International Union), Andy Stern, made a presentation against private equity. He thinks that most deals are too risky and are mostly quick flips -- which leads to greater income inequality.
He makes the following analogy: With the $4.4 billion in fees for the 10 largest buyout deals, Congress could provided health plans for 1 million workers.
As for the private equity point of view, there was a presentation from Douglas Lowenstein. He operates the newly formed association called the Private Equity Council.
His argument? Well, it's that the high returns generated from private equity firms ultimately benefit Americans, through pension funds, insurance companies and college funds. Private equity has also helped improve companies like Dunkin' Donuts, Toys R Us, Domino's Pizza (NYSE: DPZ), MGM Studios, and J. Crew Group (NYSE: JCG).
No doubt, private equity is becoming a political issue. Although, I think it's still not a "hot button" yet. But if we start to see more and more layoffs, it certainly could be. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Back in late February, I wrote a piece on BloggingStocks.com about unusual trading in TXU's (NYSE: TXU) stock options before the announcement of its leveraged buyout.
Well, as should probably not be a surprise, it looks like there was foul play. This is according to a story in The Wall Street Journal (subscription required).
The SEC has brought charges for leaking confidential information on the TXU deal. The unlucky target? His name is Hafiz Naseem and he was hired as an investment banker at Credit Suisse (NYSE: CS) in March 2006. Apparently, he provided the information to a Pakistani banker.
And, according to the SEC, it looks like more charges will be brought (so I think Naseem is talking it up).
All of this seems inevitable. With the boom in buyouts, it gets very temping to make some extra millions. Hey, isn't the SEC too busy to worry about such things?
Right now, it looks like the SEC is getting very busy and we may have a new scandal brewing. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
I can understand why CEOs complain about federal disclosure laws. They can be very revealing.
Take a look at the latest filing from TXU (NYSE: TXU), which is currently involved in a $32 billion leveraged buyout.
The company's CEO, C. John Wilder, certainly has a parachute that is pure gold. If the buyout deal gets done, he stands to walk away with $279.3 million. It sure beats a gold watch. In fact, I think he'll soon be able to buy a nice island (and no longer need to deal with those pesky federal regulations).
Okay, in the world of private equity, this is normal stuff, but in the world of utilities, this may not be so normal -- or acceptable.
TXU's buyers -- KKR and the Texas Pacific Group (TPG) -- have been working pretty hard to keep this deal on track. But with the CEO's compensation disclosure, I think things may get much tougher. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
In a bit of news that is sure to add fuel to the fire of controversy of the TXU buyout, CEO C. John Wilder will receive stock payouts of $279.3 million if the deal is consummated. According to The Wall Street Journal, "Under the change-of-control provision of Mr. Wilder's employment agreement with TXU, stock he was due to receive under the contract would vest immediately. The amount also includes stock held under a deferred-compensation arrangement. All told, at the proposed buyout price of $69.25, the shares would be valued at $279.3 million."
However he won't receive any additional payment other than those stipulated in his employment agreement with TXU. It just raises the question "How could one CEO possibly be worth $279.3 million for selling a company? He can't even hit 50 home runs!"
But based on the stock's performance, he just might be worth it. As outlandish as the pay package may seem, shareholders have made a lot more than $279.3 million on the stock since Wilder became CEO in 2004.
There seems to be no bounds on the mega amounts that private equity firms are willing to pay. Just some of the deals include the $29 billion purchase of First Data (NYSE: FDS) and the $45 billion buyout of TXU (NYSE: TXU).
So how do the pros come up with these valuations? Well, I had a chance to talk to Michael Wolfe, who is with Fesnak and Associates, LLP. He is not only a CPA but also has the ABV (Accredited in Business Valuation) and CVA (Certified Valuation Analyst) designations.
In his practice, Wolfe conducts valuations for a variety of private equity firms. "There are different approaches to valuing a buyout," he said. "But it really boils down to buying a stream of future cash flows."
To this end, Wolfe uses the discounted cash flow (DCF) method. This involves a projection of cash flows -- and even accounting for different scenarios.
There also needs to be a discount rate, which is an estimate of the risk of achieving the cash flows. "With the large influx of money into private equity firms," said Wolfe, "we are seeing discount rates fall in general. I'm not sure this means the actual risk has gone down. Only time will tell. So going forward, it will certainly be tougher for private equity firms to get the kinds of returns they have been getting over the years."
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
When TXU threatened to shut down power plants because of a dispute over a fine with regulators, KKR saw opportunity to look the good guys. As the private equity firm works over-time to clear the deal with regulators amid concerns from environmental and consumer groups, KKR took TXU's miscue as an attempt to show how nice they are. According to KKR spokesman Jeff Eller, "We're extremely unhappy that [TXU] did not consult with us first. said . This is not how the investors want to do business as the new TXU, and we will not do business that way if this transaction closes."
Does anyone else find this perfectly choreographed fit of righteous indignation a little bit transparent? KKR has never been known as the nicest group of people in the world and, amid scrutiny from all corners, the company appears to be trying to bolster its reputation.
This isn't a total shock. As Reuters points out, rival bankers have argued that Goldman was excluded from the Blackstone Group IPO because it's viewed as too much of a competitor. Goldman Chief Executive Lloyd Blankfein disputes this characterization.
Last month, Goldman joined forces with Kohlberg Kravis Roberts & Co. and Texas Pacific Group for the $45 billion TXU buyout, the largest ever.
Buyout funds are surging in popularity because of the growing demand by large investors for alternatives to stocks and bonds
But this is far from a sure thing.
``They have been leaders in identifying new trends and clearly this is where they feel their profit margins have the most growth opportunity,'' said Financial Advisory Service portfolio manager Douglas Ciocca told Bloomberg News. ``But this is risky if it decreases their liquidity.''
It will be interesting to watch to see how private equity firms and rivals on Wall Street react to Goldman's move.
Meanwhile, I bet hotel rooms are booking up fast near Goldman's headquarters in New York from companies both large and small eager to be acquired.
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BloggingBuyouts is the best resource for news, opinion, and research on the least understood, most powerful force driving financial markets today -- private equity investing. Michael Rainey, editor.
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Leap Wireless
Nothing like seeing billionaires have a hard time. But that's the case with big-time private equity kingpins, like 
CDW Computer Centers
Today, I met with a friend who is involved in a business that provides background checks on employees. He said the business is doing well -- except for the Fortune 500 customers. Why? Perhaps these companies are cutting back jobs.
Back in late February, I wrote a 
There seems to be no bounds on the mega amounts that private equity firms are willing to pay. Just some of the deals include the $29 billion purchase of 
