With global markets in turmoil – and as the credit crunch worsens – AIG (NYSE: AIG) has the miserable task of raising $75 billion to meet its capital requirements. The firm has talked to various private equity firms, who have basically wanted the keys to the operation. There were even talks with Warren Buffett.
No doubt, AIG is scrambling to assess its asset base as well. Which could fetch good values?
Interesting enough, there is one asset that hasn't received much attention: an equity stake in Blackstone Group LP (NYSE: BX).
About 10 ears ago, AIG invested roughly $150 million in the private-equity powerhouse. Now, the stock is worth about $700 billion. Moreover, AIG has investments in Blackstone funds that amount to about $1 billion.
So yes, AIG may dump these holdings on the market – and put pressure on Blackstone's shares, right?
Perhaps. Although, investors don't seem to be concerned (the stock price has held steady in the current financial storm). Then again, Blackstone doesn't have balance sheet issues. More importantly, the firm has been bulking up its abilities to capitalize on distressed investments – which seems spot-on right now.
With bulging coffers, U.S. private equity firms have been aggressively expanding into foreign markets. One of the big players is The Blackstone Group LP (NYSE: BX).
According to a piece in the Financial Times, it looks like Blackstone is taking a look at Informa Plc, a UK publisher.
Informa was formed, in 1998, as the result of a merger of the IBC Group plc and LLP Group plc, but if you take a look at the various businesses, the roots go back to 1734 with the first maritime publication.
As of now, Informa has operations in 40 countries and about 10,000 employees. Moreover, the firm organizes more than 10,000 events and conferences a year. There are also 2,500 subscription based information services.
In other words, Informa has a fairly steady business, with strong recurring revenues.
Interestingly enough, last month Providence Equity made a preliminary overture for Informa for about $4.29 billion. But getting debt financing won't be easy.
Then again, in the case of Blackstone, it might not have to worry about such things since it looks like the firm is teaming up with the cash-flush Dubai World Trade Center sovereign wealth fund.
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.
Alliance Data Systems (NYSE: ADS) is recently at $39.00 in pre-open trading, below its close of $65.60. ADS says affiliates of The Blackstone Group (NYSE: BX) have informed ADS that they do not anticipate closing the merger due to problems obtaining approvals from the Office of the Comptroller of the Currency (OCC).
ADS announced on May 17, 2007 it would be acquired for $81.75 in cash ($7.8 billion) by BX. ADS is expected to announce Q4 EPS on January 30. ADS February option implied volatility of 105 is above its 26-week average of 41 according to Track Data, suggesting larger risk.
M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Back in late November, the stock price of Alliance Data Systems (NYSE: ADS) suddenly dropped more than 20%. The rumor was that Blackstone (NYSE: BX) was going to renegotiate its $7.8 billion buyout deal for the company.
Actually, the Securities and Exchange Commission is now investigating the matter.
Despite this, there is still some jitters with the deal. That is, an analyst for SunTrust Robinson Humphrey, Andrew Jeffrey, has downgraded the stock from a "buy" to "neutral." Basically, he's concerned about the slowing economy and the continued credit crunch. He thinks there's even a chance of a deal breakup, which could take the stock to the mid $40s.
Keep in mind that Blackstone recently ditched its deal for PHH Corp. (NYSE: PHH) because it was unable to raise the financing. As a result, the firm instead paid a $50 million breakup fee.
Interestingly enough, the Delaware Court may be more amenable for deal bust-ups as seen with the recent case between United Rentals (NYSE: URI) and Cerberus (check out this piece in The New York Times). In fact, according to M&A professor Steven Davidoff, the ADS merger agreement has some ambiguities that are similar to the Cerberus deal.
And the markets are showing some concern as well. In today's trading, ADS' stock price is down 1% to $72.99. The buyout price is $81.75.
The Wall Street Journal looks at a key reason many investment banks may be unwilling to "lock horns" with The Blackstone Group (NYSE: BX) over financing for its previously announced deals: the firm generates more investment banking business than any other firm -- $646 million in fees in 2007 alone -- and it's just not worth alienating Stephen Schwarzman to save investors some money in the short-term.
This got me thinking about something: were those investment banking fees influencing the Wall Street analysts who called Blackstone a buy at its IPO, even when most in the financial press, including several of us here at BloggingBuyouts, were trashing the offering as a cash-out effort by the firm's avaricious CEO?
One indication of possible bias on the part of analysts may be the divergence between the ratings given by sell-side analysts versus independent research analysts.
Thomson/First Call reports that nine analysts cover Blackstone: 4 strong buys, 4 buys, and 1 hold.
Jaywalk Consensus polled 6 independent analysts -- "professional firms that attest to having no investment banking or other potential conflicts that might impact the integrity of their research" -- and found 1 strong buy, 1 buy, and 4 holds.
In light of the huge investment banking fees Blackstone generates and the discrepancy between independent analysts and traditional sell-siders, a cynical person might conclude that the integrity of Wall Street research is still compromised, in spite of the high-profile slaps on the wrist handed to investment banking whores like Henry Blodget.
David Rubenstein, who is the co-founder of private equity firm The Carlyle Group, has been buying and selling companies since 1987. Now his firm has 30 offices around the globe, as well as $71 billion under management.
Interestingly enough, back in the 1970s, he served in a variety of political seats -- such as the Deputy Assistant to the President for Domestic Policy (under the Carter Administration). He has also practiced law for several prestigious law firms.
So what are his thoughts on the recent turmoil in the private equity world? Well, he gave an interview for the Wall Street Journal [a paid publication]. Basically, his opinions are in-line with those of other top dealmakers, such as from the Blackstone Group (NYSE: BX) and Fortress (NYSE: FIG). That is, we won't see mega deals (because financing has vaporized).
Also, sellers will need to get more realistic on valuations, which is never easy. In fact, many just may rather wait to do deals. In other words, private equity firms will need to work much harder to get strong returns -- and it will require more patience (Rubenstein thinks this could take a couple years).
Blackstone Group LP (NYSE: BX) Chief Executive Stephen Schwarzman, who became a billionaire thanks to the firm's recent initial public offering, won't be able to stop the U.S. Congress from making his firms pay higher taxes particularly as the presidential election looms.
Legislation proposed by Sens. Max Baucus (D-MT) and Charles Grassley (R-IA) would TRIPLE the amount of taxes that the New York-based company would pay annually. The company is arguing that the Baucus-Grassley bill raising taxes on private equity and hedge funds would deprive the government of revenue because it would discourage companies from going public.
Blackstone won't win too many friends on Capitol Hill with that argument since hedge funds already get a huge break from the IRS because they pay taxes at the 15% rate of partnerships instead of the 35% corporate tax rate. To many people and quite a few economists this just doesn't seem fair.
Politically speaking this also is a losing issue for Blackstone. Americans believe in the Horatio Alger myth that by hard work and luck anyone can become rich. The public, though, has little sympathy for people who climb their way to the top by cutting corners or getting breaks that they don't seem to deserve.
The Democrats in Congress are well attuned to this reality. For them, there is no better industry to target than hedge funds and private equity firms. To most Americans, the industry is mysterious and scary. What possible downside could they have in targeting the likes of Blackstone?
As I posted earlier this month, Blackstone Group's CEO Stephen Schwarzman gave an interview to the Wall Street Journal with a compelling theme -- Schwarzman is the Napoleon of private equity. Napoleon-watch tracks his moves on the business battleground.
It looks like The Blackstone Group (NYSE: BX) would have been much better off staying private.
Bloomberg News reports that Blackstone is responsible for two of the worst IPOs of 2007. The first one? Its own last month -- which tumbled down to $23.25 yesterday before rebounding to $25.70 right before the bell -- down 17% since going public. The second lousy IPO is that of Blackstone's travel website Orbitz Worldwide, Inc. (NYSE: OWW), which is down 14% from its July 17 IPO.
Two busted IPOs from Blackstone! As they say, pride goeth before the fall. And look out below.
Yesterday two hedge fund initial public offerings (IPOs) performed poorly, according to the Wall Street Journal [subscription required]. And Blackstone Group LP (NYSE: BX) hit an all time low -- closing yesterday 12% below its offering price.
The two busted London IPOs included that of MF Global Ltd., the brokerage unit of hedge-fund giant Man Group, and hedge fund Third Point LLC. MF Global stock fell 8% on its trading debut a day after being sold well below its proposed price range. And in London, the listing of a fund by hedge fund Third Point LLC fell short of its targeted IPO size despite a one-day delay in the offering to generate more demand. It raised $525 million, short of the $690 million target.
With three recent financial IPOs tanking, it's beginning to look like a trend -- and KKR may decide that it would be better to pull its IPO rather than risk the market rattling impact of yet another busted IPO. What's causing these financial IPOs to crater? Investors are worried about their exposure to the U.S. subprime-mortgage sector and a more general widening of credit spreads in global markets.
In other words, the party is ending and I think KKR should pull its IPO -- no doubt Henry Kravis is savoring Steve Schwarzman's busted IPO with a fine claret. And I doubt he'd like to return the favor by having his IPO go bust.
Everything's big in Texas. Look at the state's Teacher Retirement System (TRS). In all, it has about $112 billion in assets.
Interestingly enough, the pension fund wants to devote about a third of its assets to alternatives, such as hedge funds and private equity funds. This is according to a story in the Wall Street Journal [a paid service].
Yes, when you take a look a the SEC filings of the Blackstone Group (NYSE: BX), Fortress (NYSE: FIG), and KKR, you will see that alternative investment can post strong returns.
Despite this, the TRS strategy is certainly gutsy. Keep in mind that alternative investments can be fairly illiquid. What if it gets tougher to do IPOs or get sound exits on these investments?
Or, what if there is a meltdown, as seen with the subprime hedge funds at Bear Stearns (NYSE: BSC)?
Even the pros can make big blunders. And it could be bad news for pensioners.
On the other hand, TRS's move is certainly good news for the private equity world. Simply put, there's likely to be many more assets under management -- and that means lots of juicy fees.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Yesterday's New York Times [registration required] discusses the pending initial public offering (IPO) of Kohlberg Kravis Roberts & Co. (KKR). In so doing, it glosses over the role of its founding partner, Jerome Kohlberg. But just because The Times ignores him, that's no reason for you to.
That's because I interviewed him three years ago for the Swarthmore College Bulletin. So without further ado, here's my interview with him:
"Kohlberg was co-founder of the leveraged buyout specialist KKR and is now special limited principal of Kohlberg & Co. His business success began with the simple yet powerful notion that it was better to risk one's own capital than to be an intermediary. "One of my friend's fathers was a merchant banker,' he recalls. "He didn't act for commissions. He stood and fell on his own investments, which he put beside those of other clients. I realized that being a principal was what I wanted.""
The Carlyle Group is talking to British cable operator Virgin Media (NASDAQ: VMED) about taking over the company for about $20 billion. Blackstone (NYSE:BX) and KKR talked to the firm about a buy-out for $15 billion late last year, so the price is going up.
Virgin's market cap is only $8 billion, so any purchase would include the assumption of substantial debt.
The real question about Virgin is why anyone would want to own it. The company competes with a robust telecommunications industry which includes BT (NYSE: BT) and Vodafone (NYSE: VOD). Rupert Murdoch's British Sky Broadcasting (NYSE: BSY) delivers video services to large number of homes in the UK. Virgin hardly has an easy time competing. Murdoch's operation is taking subscribers from the cable company, and Virgin now routinely loses money.
Over the past week, I've talked to a variety of reporters about the implosion in private equity. The problem? There has been no implosion.
Interestingly enough, they point to several articles in The Wall Street Journal on the matter. There was even a big piece on Blackstone Group (NYSE: BX) for the sister publication, Barron's.
Well, yes, the WSJ has another story on the topic today. As should be no surprise, it's negative and it's on the front page.
Basically, the negative view is that lenders are getting cold feet. After all, there are some danger signs. They include: rising interest rates, Bear Stearns' (NYSE: BSC) bailout of a biggie hedge fund, debt terms have been loosey goosey, and there funky investment vehicles like "payment-in-kind" notes.
As a result, lenders are pushing back on some deals. An example is US Foodservice's $3.6 billion transaction, which canceled its debt offering.
Basically, we are seeing mostly a readjustment in the marketplace, not an implosion (at least not yet). So deals should still get done. But, unlike the frothy past couple years, the costs will start to rev up for the private equity folks. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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With global markets in turmoil – and as the credit crunch worsens – AIG (NYSE: AIG) has the miserable task of raising $75 billion to meet its capital requirements. The firm has talked to various private equity firms, who have basically wanted the keys to the operation. There were even talks with Warren Buffett.
With bulging coffers, U.S. private equity firms have been aggressively expanding into foreign markets. One of the big players is 
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.
Alliance Data Systems
Back in late November, the stock price of 
. It should be a good read.
As I 
Yesterday's 
Over the past week, I've talked to a variety of reporters about the implosion in private equity. The problem? There has been no implosion.
