bloggingbuyouts

They say private equity is the smartest of smart money, able to generate massive profits out of thin air. Well, the folks at Apollo Management probably aren't feeling too smart today, as their $1.3 billion investment in Linens 'n Things has taken a significant turn for the worse.

Linens 'n Things has now confirmed the growing speculation that it would declare bankruptcy. As Zac Bissonnette reported in April, the company lost $242 million in 2007, after the company had gone private in February of 2006. In the last few months, it was said to be having trouble with its suppliers, which rightly feared providing it with credit and merchandise.

The odd thing is that many private equity funds saw the housing and credit crunch coming. It would stand to reason that a billion dollar chain that feeds on the housing market may not be the best investment towards the end of a great speculative housing boom, but I guess the people at Apollo thought they could work their magic whatever the market conditions.

The good news is that Linen Holdings has secured $700 million in financing from GE Capital. This should enable the company to continue operating as it restructures, although it will close 120 stores. But at least the majority of its 17,000 employees still have hope that they won't lose their jobs, at least not right away.

Without even looking at the numbers or knowing anything about the deal, most people could probably tell you that Apollo Group's acquisition of Realogy, parent company of Century 21 and Coldwell Banker, at the height of the real estate boom is probably not doing too well.

And that's just the beginning of the private equity giant's woes. There's also the Linens n' Things deal on the brink of bankruptcy and Claire's Stores. The New York Times takes a look at the company and its top man, Leon Black, who continues to invest aggressively in spite of the troubled market. Apollo came close to buying billions in debt from Citigroup last week.

The Times piece has an interesting quote from Black: "You can get equity-type returns from debt instruments that may be a better play than pure equity right now, where you can't get leverage."

Apparently the lack of liquidity in debt has made that market a lucrative stomping ground for vultures. If Black and other are content to look for value buying back debt they issued a few years ago at 40 cents on the dollar, we could see the private equity slowdown continue for awhile -- that would be bad news for stock market investors who look to buyout shops to take companies private at substantial premiums.

Sometimes brilliant people armed with spreadsheets screw up badly. Sometimes, as in the case of Linens n' Things, they screw up really badly.

In February of 2006, Apollo Management agreed to take Linens n' Things private for $1.3 billion. Now, less than two years later, the company is poised to file for bankruptcy, according (subscription required) to the Wall Street Journal. The company employs 17,000 people, with 590 stores in 46 states. The company lost $242 million in 2007.

The Journal reports that "Linens also is working to avoid or delay filing for bankruptcy protection by meeting Monday with its lenders and largest vendors to work out an agreement, but a deal is unlikely."

Linens n' Things is a victim of two of the economic woes generating the most media attention: the housing downturn and the credit crunch. In addition, lower-cost suppliers of similar products like Wal-Mart (NYSE: WMT) are taking market-share. People who are having trouble paying their mortgages tend not to obsess over thread count.

On another note, housewares retailer Pier 1 Imports (NASDAQ: PIR) appears to be making strong progress on its turnaround, with its first comparable sales gain in 17 quarters and a return to profitability -- its first quarter in the black in 12 quarters.

But its huge debt load makes it tough for Linens n' Things to weather economic storms.

Apollo Management, which is one of the largest private equity firms, has traded on Goldman Sach's (NYSE: GS) private exchange, GSTrUE OTC. Unfortunately, the shares are down 40% (since August). Of course, other alternative asset managers – such as Blackstone (NYSE: BX) and Fortress Investment Group (NYSE: FIG) – have suffered plunges as well.

So what's the next step for Apollo? Well, the firm plans to trade on the NYSE. The IPO filing calls for raising $475 million of capital.

Apollo got its start in 1990 and profited handsomely from distressed investments (keep in mind that this was after the buyout boom). Now, the firm manages $40.3 billion and has recently raised a fund for $12.5 billion. Over the past 18 years, Apollo has generated an impressive 29% net internal rate of return.

In 2007, Apollo's revenues spiked 84% to $637.9 million. Economic net income fell 59% to $152.8 million.

However, returns may come under pressure. After all, Apollo binged on a variety of dicey deals, such as Linens 'n Things and Realogy. Wall Street investors may be somewhat skeptical.

To get the full details on the offering, you can find Apollo's IPO prospectus at the SEC's website.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

Citigroup (NYSE: C) would like to get a number of troubled loans off its balance sheet before its reports earnings. Accordingly, it is close to selling $12 billion in leveraged loans and bonds to private equity firms Apollo Management, Blackstone (NYSE: BX) and TPG. The debt would be sold at "an average price slightly below 90 cents on the dollar," according to Reuters.

Citi has, by its own calculation, about $43 billion of these loans on its balance sheet. It is anxious to get rid of as much of the exposure as possible. But the potential deal raises a point. If the haircut on the loans is only 10% and the smartest equity firms in the world want the paper, why is Citi so anxious to sell it?

The answer is panic. At this point American banks are taking so much risk off of their balance sheets that some assets, which are only modestly impaired, are being sold along with those which have relatively low inherent value.

In Citi's haste to solve its problems, the baby may be exiting with the bathwater.

Douglas A. McIntyre is an editor at 247walls.com.

According to The New York Times, everybody's doing it! Well, maybe not the birds and the bees, but certainly Blackstone (NYSE: BX), KKR, and now Apollo Management, the latter to the tune of $1 billion, are investing in distressed debt.

It's no surprise that Blackstone is ahead of the game and has already raised a $1.4 billion fund to focus on cheap loans and bonds. The Deal.com also lists Cerberus and Carlyle as being interested in joining the party.

Apollo's Leon Black wrote in a letter to investors:"We're doing exactly what you would expect of us in this market -- using our distressed expertise and appetite for complexity to find investments in good companies that are available at a significantly discounted basis."

Luckily for Apollo, they happen to own some of those "good companies" that are "significantly discounted." So some of the bonds it will invest in will be issued by companies it already owns. Neat trick, huh?

As for the "appetite for complexity" -- I'll bet. Blood from a stone, anyone?

With the severe credit crunch, the private equity world has come to a screeching halt. Sure, there is some dealmaking – but nothing like it was just a year ago.

So, what are the private equity folks doing? Well, they are raising billions of dollars. This is according to a piece in the FT.com (subscription required).

Although, the typical investors in private equity funds, such as pension funds, are actually losing their appetites. There are concerns about lower returns as well as larger concentrations of portfolio risk. Just look at the recent write-downs at KKR.

Yet, the top-tier private equity firms are still having little trouble raising money. TPG plans to snag $15 billion and Apollo should also get the same amount. And, as for Bain and Blackstone (NYSE: BX), it looks like they'll get $20 billion apiece.

OK, so where is the big money coming from? Yep, it's the sovereign wealth funds. With bulging coffers – especially from oil – the money needs to go somewhere. And, with lower valuations and distressed companies, it could be spot-on timing for those with a long-term perspective.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

By most accounts, the first part of 2006 was a private equity bubble -- or, more euphemistically, a "golden age" in the words of Henry Kravis.

But with the credit market dryer than it's been in years as Wall Street digests the record wave of buyouts, there's one question that lots of people are wondering about: which companies will be the big private equity failures? What firms paid to high a price for businesses in decline and, even with cost cuts and layoffs, will have trouble making interest payments?

The Wall Street Journal has a few ideas [subscription]: Apollo's buyout of Realogy, Blackstone's Freescale Semiconductor and, more recently, Cerberus' Robert Nardelli-run Chrysler.

Realogy, which owns real estate brokers like Century 21 and Coldwell Banker, has already run into problems with its lenders and the housing slowdown probably won't make things easier.

As we watch private equity buyouts end in disaster -- and make no mistake, some of them will -- I think a pattern will emerge. The failures will occur where private equity firms bought complicated businesses that weren't easy to understand, paid a high cash flow multiple for them, and bought hot companies in hot industries.

When these firms stick to their bread and butter -- boring but consistent performers in un-sexy industries -- they'll probably continue to do quite well.

Harrah's Entertainment (NYSE: HET) closed yesterday at $87.12. HET accepted a $90 share bid from Apollo Management and Texas Pacific Group on December 19, 2006; the deal is expected to close soon. HET overall option implied volatility of 29 is above its 26-week average of 18 according to Track Data, suggesting larger price risks.

M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Apollo Management has invested $1 billion of equity in NCL Corp. Ltd., according to a report in TheDeal.com.

NCL is a Miami cruise line and the main subsidiary of Hong Kong-based Star Cruises. Star Cruises acquired NCL in 2000.

Non-leveraged investments may become more common as LBO financing becomes difficult. TheDeal.com points out that both Blackstone and Warburg Pincus have made equity investments this month.

For Apollo, this will be the single largest investment the firm has ever made, according to partner Steve Martinez.

Cash is king!

In light of the weak performance of the Blackstone (NYSE: BX) IPO, it seems reasonable that other players are looking at alternatives.

How about a private offering? That's the thinking of Goldman Sach Group's (NYSE: GS) new electronic market, called GS TRuE. Despite the funky name, it's a pretty cool idea. Since the investors are institutional, there are fewer onerous regulations -- and disclosure requirements -- in this newfangled marketplace.

Already, Oaktree Capital has issued shares on the GS TRuE. And now it looks like Apollo Management is considering an offering.

According to the FT.com, it appears that the firm is looking to raise about $1.1 billion for about 12.5% of the outstanding shares. It's actually a muted valuation -- and may reflect the troubles with Blackstone as well as the troubles in the global credit markets.

Even so, this does not preclude an eventual IPO. After all, for those investors with shares in Apollo or Oaktree, they will definitely want to get a return on their money at some point.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

It's widely acknowledged that buyout fever has to come to an end at some point, but few people in the press seem to be advocating this end coming soon. I guess I'm a contrarian on this issue -- I think there are clear signs that the private equity craze is wearing down. Well, a contrarian to everyone except the private equity firms' leaders.

Today, news that Apollo Management is hoping to go public through the "back door" hit the wires. This type of offering (called a 144A) allows Apollo to "sell shares of itself quickly while avoiding for several months the disclosure involved in a public offering," according to a New York Times piece on the story. This filing essentially allows Apollo to sell only to institutional and other "sophisticated investors," rather than any investor who can trade on the New York Stock Exchange. However, Apollo hopes to be trading on the New York Stock Exchange by the first quarter of next year, according to the Times.

For some reason, investors still want to buy into Blackstone Group (NYSE: BX), KKR's upcoming offering, and probably Apollo's future offering. I don't know how many times it needs to be said, but I'll say it again: these executives aren't selling to the public to share from their bounty -- they are selling out because they realize things can only get worse from here. Apollo isn't rushing to sell its company for no reason -- it believes bad times are coming.

Spurning a $25.25-per-share offer from Dutch manufacturer Basell AF, the board of Utah chemicals company Huntsman Corporation (NYSE: HUN) has chosen instead to accept a bid from Hexion Specialty Chemicals, an arm of private equity house Apollo Management LP.

At $28 per share, the all-cash deal is valued at $6.5 billion. Huntsman had earlier agreed to Basell's offer of $5.6 billion, announced June 26. Basell had until yesterday to raise its offer but declined.

Hexion took on several penalties to get the deal done, covering half of Huntsman's $200 million fee for breaking off the Basell deal and agreeing to pay an 8 percent premium for the Huntsman stock if the deal remains unfinalized after nine months. Hexion had raised its bid slightly on Monday, a 2.8% increase over its previous offer of $27.25 per share.

Apollo said that if the deal clears, Hexion will gain notable depth in the Asian markets, expanding to 180 facilities worldwide. Its sales will top $14 billion.

Apollo established Hexion in 2005, combining Borden Chemical, Bakelite, Resolution Performance Products, and Resolution Specialty Materials.

Huntsman shares dropped $1.18, or 4.28 percent, to close at $26.39 on Thursday.

Today, buy-out firm Apollo Management raised its bid for Huntsman Corporation (NYSE:HUN) to $6.5 billion ($27.25/share), a 2.8% increase from a previous offer, according to Reuters. This rise can be attributed to bidding competition from the Dutch company Basell, which previously agreed to buy Huntsman for $25.25.

Apollo's offer is roughly 18x analyst estimates for full year 2008 earnings, and about 20x this year's earnings. This is in-line with the industry's 20x earnings multiple. Apollo is likely attempting to purchase this company to increase Huntsman's margins, as the company currently produces a weaker gross and operating margin than its industry - 14.6% gross margin vs. 20.8% for the industry, and 5.5% operating margin vs. 7% for the industry. Over the last several years, Huntsman has steadily decreased its liabilities, mostly attributable to cutting long term debt roughly in half.

With Blackstone Group LLC (NYSE: BX) already public and KKR on its way to the NYSE exchange, there is lots of chatter about the next candidates. Well, according to a recent report in the Wall Street Journal [a paid service], it looks like Apollo Management may be trading soon.

Interestingly enough, the firm's founder -- Leon Black -- took a trip to Abu Dhabi. Yes, there's a ton of money there and I'm sure some eager investors who would want to be a part of Apollo. Although, it looks like there are some issues on valuation.

An investment from Abu Dhabi would likely mean a boost for Apollo's efforts in emerging markets. As the dealmaking gets crowded in the U.S. and Europe, private equity needs to find new frontiers of opportunity.

So, with a slug of capital from Abu Dhabi, Apollo might then file for an IPO and get even more money from U.S. public investors.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements