Filed under: The Blackstone Group, Private equity industry, Blackstone, IPO, 2007

The chart to the right shows the performance of Stephen Schwarzman’s Blackstone Group (NYSE: BX) since its IPO earlier this year. Just by looking at the stock price, you can tell that Mr. Schwarzman has some explaining to do.

At the time of the much-anticipated IPO, a lot of people, myself included, were warning investors to stay far, far away. It didn’t appear that there was any reason for Blackstone to go public other than to allow insiders to cash in some of their chips at the absolute top of the private equity boom.

Of course, that’s exactly what happened, and the IPO’s poor performance has only added to Schwarzman’s less than stellar reputation. In a recent speech covered by The New York Times, Schwarzman ran through all the traditional arguments about why private equity is good for the economy. He also added a somewhat bizarre twist, saying that the industry will help to mitigate the negative consequences of globalization.

Schwarzman can, and should, defend his industry all he wants. But the fact that he took the company public in what looked like a pretty self-serving money grab — the IPO valued Schwarzman’s stake at more than $7 billion — will probably sully his reputation forever.

Read | Permalink | Email this | Linking Blogs | Comments

Share This

Filed under: Private equity industry, Activist investing, Value and lack thereof

Wendy’s International (NYSE: WEN) may not see an auction-style sale after all. After months of speculation about the fate of the global burger flipper, the sale of the company may be on indefinite hold due to continued turmoil in the credit markets. What this means is that Wendy’s will remain for sale after a short intermission. The length of that intermission may be six months or longer.

Although bids on the company are due today at 5:00 pm EST, the company may pull the rug out from under the bids it has received so far and put the sale of the company on hold. Activist investor Nelson Peltz, who said he has been interested in buying the company (and who pushed for a sale) will most likely
have to go home empty-handed today.

The problem is the financing provided by the banks servicing Wendy’s at this time. Apparently, the conditions of such a sale by the chain’s two largest bank creditors contain details that could leave a nasty taste in the mouth of bidders; a sales contract clause gives the two banks (JPMorgan and Lehman Brothers) the right to withdraw financing if the credit markets continue to deteriorate further. Without a crystal ball, who knows when or if that will happen. My guess: the credit market will sink further into 2008. Get ready to ride the wave.

Permalink | Email this | Linking Blogs | Comments

Share This

Filed under: Deals, The Blackstone Group, Rumors, Financials and analyticals, Engagements, Private equity industry, Investments, Public or private?

Allegheny Tech (NYSE: ATI) is recently up $2.60 to $96.83 on renewed buyout chatter. ATI, a diversified specialty metals producer, has a market cap of $9.4 billion. ATI November 105 calls have traded 155 times on transaction volume of 2,017 contracts, above its open interest of 1,813 contracts. ATI November 95 straddle is priced at $7.50. ATI December option implied volatility of 53 is above its 26-week average of 43 according to Track Data, suggesting larger price risks.

Alliance Data Sys (NYSE: ADS), a provider of loyalty and marketing solutions derived from transaction-rich data, announced on 5/17 it would be acquired for $81.75 in cash ($7.8 billion) by Blackstone Capital Partners (NYSE: BX). ADS is recently trading at $76.91. ADS call option volume of 5,935 contracts compares to put volume of 28,841 contracts. BX is expected to close on the purchase of ADS before the end of the year. ADS December option implied volatility of 26 is above its 19-week average of 16 according to Track Data, suggesting larger risk.

Merger Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Permalink | Email this | Linking Blogs | Comments

Share This

Filed under: KKR, Private equity industry, Public or private?

When KKR filed its IPO, the firm mentioned that it was exploring activities beyond its core private equity business.

Well, it’s getting started. As pointed out in a recent piece in the Wall Street Journal [a paid service], KKR is edging into the IPO game. That is, the firm is the joint book-running manager on an equity offering for Rockwood Holdings (NYSE: ROC), which is a major specialty chemicals manufacturer. The company plans to issue 10 million shares.

Basically, KKR will help to drum up investors for the offering. No doubt, it’s a lucrative business (where commissions have held steady over the years). In fact, KKR is a major shareholder in Rockwood (always nice to double dip, huh?)

Despite the fact KKR is getting competitive with Wall Street investment banks, that’s not having much impact on this deal. After all, Goldman (NYSE: GS) and UBS (NYSE: UBS) are participating.

And, with private equity cooling off, it seems KKR has no choice but to expand its business — turning itself more into a full-fledged financial services firm.

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

Permalink | Email this | Linking Blogs | Comments

Share This

Filed under: Private equity industry, Investments

Marathons and other running events are attracting the attention of private equity firms, according to BusinessWeek. This isn’t the industry’s first venture into the outer edges of professional sports. Mandalay Sports Entertainment, controlled by Seaport Capital, owns five minor league baseball teams.

According to The Dow Jones Private Equity Analyst Conference, “Private equity investors already are involved in the ownership of the Boston Celtics, Golden State Warriors, San Jose Sharks and Texas Rangers and several private equity firms are looking at buying franchises or even the entire National Hockey League.”

In a way, these are great examples of the kinds of businesses private equity firms love: Strong moats, often asset-lite models,

But there could be another added bonus here. Private equity firms frequently take portfolio companies public after they improve operations and increase profitability. Given the sexiness of professional sports, the ventures could command premiums on the IPO market. Brokers wouldn’t have a hard time pitching retail investors on the idea of owning a professional sports team or a well-known marathon.

It seems likely that private equity interest in sports franchises and events will increase over the years.

Read | Permalink | Email this | Linking Blogs | Comments

Share This

Filed under: Top deals, Private equity industry, Activist investing, Shareholders

BEA Systems(NASDAQ:BEAS), a leading supplier of service-oriented architecture (SOA) and middle-ware software, received a proposal on 10/12/07 from Oracle(NASDAQ:ORCL) to be acquired for $17 a share in cash. BEAS closed at $18.20. BEAS shareholder, Carl Icahn, wants BEAS wants to be auctioned off. BEAS over all option implied volatility of 26 is below its 26-week average of 39 according to Track Data, suggesting decreasing risk.

Biogen(NASDAQ:BIIB) announced on 10/12/07 “that its Board of Directors has authorized management to evaluate whether third parties would have an interest in acquiring the company at a price and on terms that would represent a better value for stockholders.” BIBB will report EPS on 10/23. BIIB November option implied volatility of 37 is above its 26-week average of 32 according to Track Data, suggesting larger risk.

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

Permalink | Email this | Linking Blogs | Comments

Share This

Filed under: The Carlyle Group, Private equity industry

A number of news reports in the last few weeks have drawn attention to the involvement of private equity firms in health care companies, particularly nursing homes. Now comes news that Congress wants to look into the situation. Senator Hillary Clinton of New York, a Democrat, and Republican Senator Charles Grassley of Iowa have asked Congress to investigate the situation.

The source of the growing concern about care at for-profit nursing homes owned by private equity firms is an article in The New York Times published in September. The title of the article sums up the situation pretty well: “At Many Homes, More Profit and Less Nursing.” It seems that when private equity gets involved in providing nursing care, more money goes toward making investors comfortable and less toward the elderly folks who actually live in the facilities.

I doubt that too many readers will find this claim surprising. Private equity funds search for return on investment. If a couple thousand old people live a little less comfortably, or die a little sooner — well, too bad. Profits must be made, and the higher the better. What may come as a surprise, though, is the size of this market. For example, the Carlyle Group plans to buy Manor Care Inc. (NYSE: HCR), the largest U.S. nursing home owner, for $4.9 billion. That’s an awful lot of bedpans.

And it turns out that private equity firms are ideally suited to run these operations — assuming that what you want is the highest possible profit rather than, say, excellent care for the elderly. Private equity excels at wringing out costs, and so has no trouble firing many of those expensive nurses who take care of the patients. Private equity also loves to create debt and ownership structures so complex that no one can figure out who actually owns a business — thus shielding the owners from lawsuits. And the business deals with a powerless group of consumers, many of whom are subsidized by government payments. No wonder private equity firms are jumping into the business! Just hope that your elderly relatives stay healthy and strong . . .

Permalink | Email this | Linking Blogs | Comments

Share This

Filed under: Private equity industry

The Wall Street Journal reports [subscription required] on the little-understood risks associated with hedging, particularly at some major financial institutions:

The important thing to remember is that hedging can’t really eliminate risk — risk can only be transferred. It’s like the first law of thermodynamics. It can be transferred from one trader or institution to another but it can never be eliminated. With some of the major investment banks having booked big gains on bets on the subprime collapse, many on Wall Street are still wondering who was on the other side of the trade. And there is also concern that the banks are failing to make adequate disclosures about how they are making their money. Some have asked whether the banks’ earnings are, as Enron’s earnings were once described, a black box.

Whenever you hear about hedging and risk management, remember that one company can control its risk. But there always has to be another party to the trade and there is simply no way for the economy as a whole to eliminate the risk of giving mortgages to people who can’t afford them.

Permalink | Email this | Linking Blogs | Comments

Share This

Filed under: Private equity industry

You might think that the problems in the credit markets and the losses suffered by some hedge funds would put a damper on the ability of private equity firms to raise money from investors, but that hasn’t been the case.

According to The Wall Street Journal’s Deal Journal blog, 232 private equity firms raised $254 billion in the U.S. in 2006. In the first three quarters of 2007, 295 firms have raised just under $200 billion. If the current pace continues, private equity should pass the 2006 mark. (The numbers come from Private Equity Analyst, an industry newsletter published by Dow Jones & Co. (NYSE: DJ).)

Buyout funds have been the dominant type over the last few years, and that continues to be the case. Buyout funds have raised $155 billion so far this year, which is 50% higher than the $100.7 billion raised at this point in 2006. The strong interest in buyouts is probably related to the credit crunch, as sharp-eyed and sharp-clawed investors prepare to feast on distressed companies. Venture funds, however, are not doing as well, raising only $18.8 billion this year, down from $21.3 billion last year.

Permalink | Email this | Linking Blogs | Comments

Share This

Filed under: Private equity industry

You may think the subprime mortgage mess is huge. Well, just around the corner a larger elephant is looming and its impact may be even more devastating than the current credit crisis.

While it sounded like good news when banks sold $30 billion of loans for leveraged buyouts last week, $26.4 billion of that was for the First Data buyout. That sale came with a big price tag — banks agreed to sell the debt at 96 cents on the dollar, which means they locked in losses after their fees.

And then there was the problem of what to do with the other 90% of LBO loans in the pipeline.

The Wall Street Journal [subscription] reported today that Citigroup Inc. (NYSE: C), Credit Suisse Group and J.P. Morgan Chase & Co. (NYSE: JPM) hold $400 billion in debt they promised for financing purchases private equity firms have in the works globally. If they can’t sell the debt, they’re left holding the bag, which means a lot less money for other loans. If the economy slows as expected and corporate profits weaken, the only way the banks will be able to unload the debt they’re holding will be a fire sale on that debt at even deeper discounts then the First Data deal.

According to the WSJ article, hedge funds, which usually buy a lot of LBO, debt sat out the First Data sale because they expect to be able to pick up the debt even cheaper in the future. Just like when you want to buy a house, if prices are dropping, you sit on the sidelines and let the market fall to get the best bargain. Someone caught up with a house that won’t sell may end up in foreclosure. While the banks aren’t anywhere near foreclosure, if they are forced to take deeper and deeper discounts to get rid of the debt, what will happen to their bottom line and the investors who hold their stocks?

Lita Epstein is the author of more than 20 books including “Trading for Dummies” and “Reading Financial Reports for Dummies.”

Permalink | Email this | Linking Blogs | Comments

Share This