Back in the mid 1970s, three smart investment bankers from Bear Stearns started a new firm, KKR. They helped create a new way of buying companies called an LBO -- a leveraged buyout. Since then, KKR has been an innovator in that and other financial structures.
Well, this week, we got news of another one: KKR is going public through a complicated exchange of securities. KKR will merge into KKR Private Equity Investors, which is listed on the Euronext Amsterdam. This firm essentially is a co-investor in KKR deals; it raised $5 billion in May 2006 soon after it was formed. Ultimately, KKR will own about 79% of the entity.
From there, KKR will then list on the New York Stock Exchange, likely in Q4.
Something else: KKR will not get cash in the transaction, nor will the partners or employees. The insider shares will be locked up for six to eight years.
Hollywood veteran Robert Halmi and his son, Robert, helped to build an entertainment firm back in the late 1970s, and it turned out to be a great success. In fact, by 1994 they sold it off to Hallmark Cards. Then, in 2006 Robert teamed up with Kelso, a private equity firm, to acquire Hallmark Entertainment, which was renamed RHI Entertainment.
Essentially, RHI develops and distributes made-for-television content and mini-series. Last year, the company posted $232 million in revenues and adjusted EBITDA of $33 million.
A key asset is RHI's film library, which includes more than 1,000 titles (or 3,500 broadcast hours). No doubt, this is a big source of future cash flows. What's more, the company is expanding into new categories, such as video-on-demand and pay-per-view.
Some of RHI's customers include ABC, CBS (NYSE: CBS), GE's (NYSE: GE) NBC, Spike TV and USA Network. There are also deals with global broadcasters, such as Antena-3, M6, PROSIEBEN-SAT1, TF1, Seven Network and Sky.
Unfortunately, the IPO market has been rocky lately. As a result, RHI had a dicey start – with the stock price falling 3.57% to $13.50 in today's trading.
Metals USA Holdings Corp. filed to come public this morning via an initial public offering. The company is taking the proposed ticker of "MUX" on NYSE. For filing purposes, it intends to sell up to $200 million in common stock.
The company is one of the largest metal service center businesses in the United States, and is a leading provider of value-added processed carbon steel, stainless steel, aluminum, red metals and manufactured metal components.
This is a private equity held company, and investment funds affiliated with Apollo Management, L.P. are the principal stockholders. Some proceeds will go to the company and some to shareholders, although those percentages have not been set. It also looks like the company will repurchase some or all of $300 million of senior floating rate notes with the proceeds.
Read the full story from 247WallSt.com. Jon Ogg produces and edits the "10 Stocks Under $10" newsletter and he does not own securities in the companies he covers.
According to a report from the Ernst & Young's quarterly US IPO Pipeline Report, IPO activity is flattening as companies are waiting and watching to market to make their move. While that observation is obvious as a heart attack, there are some rather good details that may lead to help determine good IPO's versus bad IPO's in that report.
In the first quarter of 2008, 90 IPOs sat in the pipeline, the same amount as the last quarter of 2007. New registration was stable across the quarters, but the slide is still downward sequentially. In January there were 10 while February and March saw only 6 and 7, respectively. While the amount the registrations represent grew this quarter compared to last, $16.8 billion up to $17.3 billion, the numbers slowed toward the end of the quarter. It seems pre-IPO companies are holding tight and watching the market.
As expected, first quarter 2008 weakened compared to the first quarter in 2007. In the first quarter of 2007, 103 deals waited in the pipeline compared to 90 in 2008. In 2007, the registrants represented $22.8 billion compared to $17.3 billion in 2007. The average deal size also dropped, down to $192 million from $221 million. The largest deal in 2007, The Blackstone Group L.P. (NYSE: BX) reached $4.0 billion while in first quarter 2008, the largest was American Water Works at $1.6 billion. Visa Inc. (NYSE:V) was left off because of an end of quarter and for size issues as 'one of a kind.' Companies are also sitting in the pipeline much longer, 163 days on average compared to 113 in 2007.
Technology takes up the bulk of the pipeline with 26 registrants and $3.3 billion in dollar amount, up from $2.8 in fourth quarter 2007. Technology attracts foreign issuers with four out of five foreign issuers in the technology sector. While technology went up first quarter 2008, oil and gas dropped 60% from $5.3 billion fourth quarter 2007 to $1.9 billion. Biotech accounts for a solid 12 registrants and pharmaceuticals tally 11. California leads on a state-to-state basis, filing 16.7% of the total filings at 15. Texas and New York followed with 11 and 8, respectively.
Also according to the report... Patience and confidence are likely to ebb by June, but if you're a good company with solid business plans, practices and proven results, opportunities still await you in the markets.
Deutsche Bahn AG is closer to coming public. A report out of FT has noted that the German rail operator has already prepared the guts of its prospectus for its the planned initial public offering. It is also said that an advance report to be published Wednesday.
Past reports have shown that a 25% to 25% stake would be sold, and this looks like a call for about 24.9% of the company would be listed under the name "DB Mobility & Logistics."
The German railway company plans to acquire several logistics firms within the next weeks in places such as in Italy and the U.K., according to the report. On a dollar-adjusted basis, you could expect a sale for the public float of some $4.8 billion to $7.9 billion.
If there is a privatization that has been in the works for an eternity, it is this one.
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.
There has been quite a bit of buzz around the trends in special purpose acquisition companies, or SPAC's, of late. In fact, it seems that about two of every three IPO filings that get filed are from SPAC's. These SPAC IPO's offer the public essentially a call option to participate in private equity that will end up being publicly traded stocks. Ultimately, these will become operating companies or within 24 to 30 months investors will receive their cash back minus a few percentage points.
Attention is still being given to the fact that J.W. Childs Acquisition I Corp. was filed to raise $200 million. This was two weeks ago too. Some have asked if J.W. Childs is testing the water here or if this is because they would have trouble raising a private equity fund on their own. If you want a confusing explanation, the answer is "both and neither."
SPAC's are changing as well. In the past, Goldman Sachs (NYSE: GS) has avoided SPAC's and blank check offerings. The reason is that the stigma behind these from the 1990's wasn't a good one. All things change in time. Goldman Sachs just filed for its SPAC initial public offering this week. They also made the terms slightly more tight than most other underwriters.
Opinions on traditional private equity firms going into SPAC launches vary already and they will vary only more in the future. But this strategy makes life easier for the private equity firm. For starters, they don't have to go run through all the hoops associated with raising a private equity fund. They don't have to use their own sales or biz0dev team to go spend the 90 to 180 days or longer due diligence period. This allows them to make the brokerage underwriting firm go do the leg work and allows them to distribute units that are publicly traded to retail and/or institutional clients. It also gives the private equity firm a two-year time frame as breathing room to go pick their deals.
Arguably, it even allows the firms to go through other private equity firms' portfolios to see if there are businesses or units that can be bought that would have otherwise been stuck as a buried entity.
There are many critics of SPAC's and traditional blank check IPO's. But this may be a trend you don't have to like. You just have to accept it for what it is.
Do we count private equity firms that wanted to go public as being dead deals? DealBook from New York Times ran a piece this morning wondering about the longstanding IPO shelf filing for private equity firm KKR.
We are still awaiting private equity firm KKR's initial public offering. The firm originally submitted its IPO paperwork to the S.E.C. in July, 2007. There has been no word since the last amendment in November.
This article notes that people are contemplating the delay: Are they waiting for the market to turn to better the price? Or are they considering a private placement? Time will tell.
There is another take on this from your truly. The Blackstone Group, L.P. (NYSE: BX) has already shown how private equity deals are much different and that the size of deals is far smaller. Their IPO has also lost more than half of its value from highs to lows. It's obvious KKR won't want to run the same gauntlet, at least not today.
Egyptian buyout firm Citadel Capital may actually be coming public. A report out of DealBook from the New York Times discusses that the firm plans to raise $150 million to $200 million from a public offering later this year.
The firm currently manages $7 billion in assets and intends to use the capital for ventures in the energy, food and manufacturing industries.
This article also noted that according to managing director Mr. el-Houssieny, Citadel is in discussions with four undisclosed international banks regarding the offering. It also notes that it is looking into whether it should list in London, Cairo, or Dubai.
In 2007, the company purchased Rally Energy Corp, a Canadian oil company, for $849 million and was involved in the Egyptian Fertilizer Co.'s $1.41 billion sale.
This would be an interesting change of pace. Imagine a private equity and LBO firm in the U.S. announcing it would come public. They would be told to go away until next year. Now imagine if you were selling this only to Americans and it was an Egyptian company wanting to do this. Maybe the decoupling argument isn't as ludicrous as we think.
One of the after effects of the recent private equity boom is a record number of buyout shop-owned companies that may find their way back to the public markets.
The Wall Street Journal's Dennis K. Berman wrote (subscription required) about this today, saying that, "The mergers-and-acquisition markets have shut, as potential buyers wait for asset prices to decline. One can only hope that a mass of over-leveraged and overpriced assets will stay out of public-investor portfolios. But don't bet on it. There is too much inventory to move."
Given that a glut of private equity cash-out IPOs seems inevitable, I think that investors should exercise extreme caution with these companies. Private equity firms won't be taking their holdings public out of an altruistic desire to share the wealth with you: they'll be looking to cash out and book profits when they feel they can get a compelling valuation.
In some ways, I think it's analogous to the IPO of Blackstone Group (NYSE: BX), which amounted to a perfectly-timed effort by CEO Stephen Schwarzman to cash in his chips -- at the expense of anyone who bought in to the IPO.
Investors looking for bargains should bear in mind that private equity firms look to acquire assets at a bargain and sell them at a premium. If you're buying assets from a private equity firm, you should expect that you will have to pay that premium.
Apax Partners, which took clothier Tommy Hilfiger private in 2006 and had planned to take the company public again soon, has shelved (subscription) those IPO plans in light of the weakened capital markets.
The company said that, "Considering recent volatile market conditions, management and shareholders decided to postpone an IPO process until such time that market conditions have stabilized".
Regardless of when the IPO takes place, the $1.6 billion buyout of the company is a shining example of the value-adding changes that buyout shops can make. After Apax took it private, the company moved its headquarters to Amsterdam, and let its U.S. sales plummet by 50% in one-year, focusing instead on the European market where the label is trendier and able to sell at higher price-points.
As recently as October, it was expected that Apax would be able to book a $1.7 billion profit on the company. As strong as the performance has been of late, I can't help wondering whether Hilfiger would do best remaining private. Even with improved financial statements, Hilfiger is best-known as a brand that was iconic during the 1990's, and Apax might have a hard time getting investors to pay up for that.
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.
"Any fool can buy a company...you should be congratulated when you sell." - Henry Kravis, KKR
In recent years, the spike in assets for the private equity industry has caused a boom in buyout activity throughout the world. Buyouts are everywhere, from the United States to Australia.
The theory behind the private equity strategy is that a company can be run more successfully under a well-trained private management team than it can be run as a publicly traded company. People argue that because the company is private, the management team has more room to make change because it doesn't need the consent of shareholders.
While this argue is rational, many people seem to forget that the private equity firms don't want to hold a company forever -- they want to sell the company back to the public as a theoretically better company and cash out. As a result of the recent super-spike in buying activity in the U.S. markets, one could rather easily see way too much I.P.O. activity several years from now, when the funds want to take the companies back to the public market.
In case you've been sleeping under a rock, private equity funds have been taking companies private at a record pace for the past few years. But what gets swallowed must get come out the other end, and sooner or later the markets will be flooded with a diarrhea of IPOs from the buyout shops. According to The Wall Street Journal'sAhead of the Tape column [subscription], private equity may be getting ready to begin shopping its wares to the public: "At Goldman Sachs Group the last few years, bankers focused only on arranging buyout financing. Now they are helping plot exit strategies. The average holding period for companies private-equity firms buy has gone from over three years to 18 months in this frenzied cycle."
But the scariest thing for investors is the next line: "The upshot is that private equity could become a weight on the market by dumping new supply on investors. The president of one of the largest private-equity firms estimates that without private equity's demand, stock prices would be 20% lower today."
This is a potential risk factor that hasn't been talked about much, at least not that I've seen. If the private equity funds decide to rush to market with all these companies they've been taking private the past few years, could markets plunge under the weight of oversupply?
In this week's Barron's [a paid service], there's an in-depth look at the mega IPO of the Blackstone Group (NYSE: BX). It's the most important IPO since the offering of Google (NASDAQ: GOOG), although investors shouldn't expect the same kind of returns.
While Google signaled a burst of growth in online advertising (which appears to be long-term), it looks like Blackstone is really signaling a top in the private equity space. Why?
Here are some bullet points:
Competition: KKR, Goldman Sachs (NYSE: GS), TPG, Apollo and others all have big war chests and are competing for deals. This drives up valuations -- making it more difficult to get strong returns. This is essentially what happened with venture capital during the internet boom.
Institutional Pushback: Institutions and hedge funds are pushing for higher prices on buyouts. An example is the Clear Channel (NYSE: CCU) deal.
Higher Interest Rates: Private equity has been blessed with dirt-cheap interest rates and this makes it easier to generate returns. But with interest rates climbing, things are getting more difficult.
Politics: Capitol Hill needs more tax revenues. So why not raise rates on private equity?
Yes, Blackstone has posted a stunning 22.6% average annual rate of return (adjusted for fees) since 1987. But, with all these ominous trends, will Blackstone continue the pace? And, is it worth paying 2 times the multiples of companies like Goldman Sachs and Morgan Stanley (NYSE: MS)?
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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Back in the mid 1970s, three smart investment bankers from Bear Stearns started a new firm, KKR. They helped create a new way of buying companies called an LBO -- a leveraged buyout. Since then, KKR has been an innovator in that and other financial structures.
Hollywood veteran Robert Halmi and his son, Robert, helped to build an entertainment firm back in the late 1970s, and it turned out to be a great success. In fact, by 1994 they sold it off to Hallmark Cards. Then, in 2006 Robert teamed up with Kelso, a private equity firm, to acquire Hallmark Entertainment, which was renamed RHI Entertainment.
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