Category ArchivePrivate Equity
A private equity firm has gotten into the act of shoring up a firm hit by the housing crisis. Texas Pacific Group, TPG will inject $5 billion into Washington Mutual (WM):
Washington Mutual, the country’s largest savings and loan, is poised to receive a $5 billion investment from TPG, a big buyout firm, and several other investors, people briefed on the situation said Monday.
Details of the transaction are still being sorted out, but a deal could be announced as early as Tuesday.
The injection of capital will help Washington Mutual shore up its balance sheet, which has been hurt badly by a drumbeat of losses amid the current housing crisis. Federal banking regulators have stepped up scrutiny of the big mortgage lender, concerned that its financial health was deteriorating.
But some Wall Street analysts said Monday that it remained unclear whether the new investment, more than half of its $9 billion market value on Friday, would be enough to ensure the 119-year old institution remains independent.
Private equity groups don’t invest unless they expect big paydays. Their investment puts them in a position to take the company private to later take it public or reap big profits from a WaMu buyout.
In getting out of this burst bubble firms and capital will be reallocated. Like Bear Sterns companies will dies and others will be transformed. The changes will be painful, but their needed to get the economy back on a more sound foundation.
“$5 Billion Said to Be Near for WaMu”
[Cross-posted on The American Mind.]
The private equity boom hit Milwaukee. For fans of an independent Midwest Airlines (MEH) this is a good thing. TPG Capital agreed to pay Midwest shareholders $16/share cash to take the airline private.
An interesting wrinkle is Northwest Airlines, the number two carrier out of Milwaukee’s Mitchell International Airport is putting in some money. Rick Esenberg observes, “AirTran had argued that they would actually increase service to Milwaukee by making it a second hub. Northwest must have believed it.” Or else why did get in the deal? That somewhat disparages the theory going around that Air Tran would reduce service to and from Milwaukee.
TPG/NWA won for a simple reason: they offered something better than Air Tran. The Orlando-based airline offered $15.75/share in a combination of cash and stock. TPG/NWA went with all cash. Cash’s liquidity is less risky than Air Tran’s stock. That’s understandable. The only airline to consistently earn a profit since the airline depression following the Sep. 11 attacks has been Southwest. Few think Air Tran is on par with the king of lost-cost flying.
The question now is what will be Midwest’s path to continued profitability? The Milwaukee Journal Sentinel reports TPG will let Midwest continue with its current plan of moderate growth including adding more seats to its signature two-by-two configuration. How that fits with TPG thinking there’s a market for higher-end travel I don’t know. The industry trend is towards low-cost with added bonuses. JetBlue offers all passengers satellite tv and radio, and Southwest offers its quirky style. We all know about JetBlue’s basic problems of getting people on and off their planes so the market may want an airline with a higher price that better ensures passengers get where they want to go. If so Midwest is in a good position. TPG is banking on it.
“What’s in the Cards?”
Private Equity 25 Feb 2007 12:57 am
Private equity’s thirst can’t be quenched. Kohlberg Kravis Roberts and Texas Pacific Group are reportedly working on buying Texas utility TXU Corp (TXU). Depending on the finally agreed upon stock price the deal could be worth $44 billion making it the largest leveraged buyout in U.S. history. It would top the $33 billion purchase of HCA last year.
In order to get regulatory approval TXU will scrap plans to build eight coal-fired plants and join a corporate group urging carbon dioxide emission regulation. They hope to keep environmentalists off their back.
Blackstone Group CEO Steven Schwarzman has been declared the poster boy of private equity by Fortune. A little of it might be the lavish party he threw for 500 of his friends. But most of it comes from the billions Blackstone is raising and spending to buy companies like Pinnacle Foods and Equity Office Properties. When you’re king of the hill it’s not a surprise people take you seriously even though you don’t really know what you’re talking about.
The Fortune article peers into the Monday Blackstone meeting where all their deals are examined. From buyouts to real estate to hedge funds everything is poured over. With $124 billion in purchasing power Blackstone’s weekly meetings won’t get boring anytime soon.
For more private equity goodness here’s Fortune’s “Private Equity Power List” which just ranks firms’ money-raising power along with peHUB’s Dan Primack complaining about the magazine’s methodology. Then there’s John Carney who’s tired of business mag lists.
Private Equity 12 Feb 2007 07:41 am
Will we see more hedge funds hit the U.S. stock markets? With Fortress’ good start the answer is yes. Just don’t expect a flood of them:
But experts noted that only the most established hedge funds, with multiple trading strategies and a history of trading success will tap the public markets.
“No one is going to be interested in doing an IPO for a $500 million firm,” said John Van, chief operating officer of Greenwich Alternative Investments, a hedge fund research firm. “A company would have to have billions of dollars for an IPO to make sense.”
Hedge funds like public markets because their capital source is more stable. Stockholders can buy and sell their shares on the open market instead of pulling their money out of the fund once a quarter.
Private Equity 07 Feb 2007 08:49 pm
With names like Blackstone, KKR, Carlyle Group, and Texas Pacific private equity firms are the black bodies of the financial world. Just by looking at their names you don’t know what business they’re in. You don’t know what they do, what makes them powerful and feared. They radiate dark energy while allowing few to know the source or the means of its production. About the only entity more nebulous is the hedge fund, but with Fortress soon to go public they don’t mind as much attention.
Private equity firms would just like to raise billions, buy companies, pay off the debt, and sell the companies without the distractions from newspapers, interest groups, and–yes–weblogs. Unfortunately for them when they amass huge sums of money and buy anything from Australia’s Qantas to the Minneapolis Star Tribune to Burger King you’re going to get noticed. Even more attention will be drawn to the industry if Bain Capital founder Mitt Romney stakes a firm claim to the 2008 GOP Presidential nomination.
Some in the U.K. are in a tizzy (is that a British term?) over three private equity firms buying the J Sainsbury supermarket chain. It’s brought into the open the voracious appetites of these financial powerhouses. In Davos, Switzerland at the recent World Economic Forum Phillip Jennings of the UNI global union wailed, “They are like a global vacuum cleaner hoovering up assets at any price, anywhere, any time and we want to bring them out of the shadows.” Critics complain about the firm’s modus operandi: borrowing lots of money to buy companies, either selling off pieces or using the company’s cashflow to pay off the debt, then selling the company to someone else (like another private equity firm as in the case of Network Solutions) or taking it public. What they ignore is Professor Christoph Zott’s view that “taking a company private can shield it from the short-term pressures of public markets.” A private company missing its quarterly earnings expectations doesn’t risk massive investor panic.
In the U.S. there’s a similar unease with private equity firms:
As private equity moves further into the public spotlight, investors are also starting to express wariness over buyouts.
Shareholders of Clear Channel are set to face off with the company’s board next month over the proposed $26.7 billion buyout of the radio station owner – one of the biggest buyout deals announced last year.
“Shareholders are more aware on a whole range of issues affecting the capital markets today than they have been in the past and the new force of private equity is one of them,” said Eleanor Bloxham, president of the Value Alliance, a group that advises companies on corporate governance.
Private equity players say the industry’s negative reputation isn’t justified and attribute it to a lack of public understanding. They argue that in many cases companies can execute better in private hands, when they don’t have to focus on delivering quarterly results to Wall Street.
In addition, they say that shareholders benefit since they receive a premium on their stock when a deal closes. And unlike in the past – when private equity firms were viewed as corporate raiders intent on stripping firms – now more public companies are welcoming private equity.
“By and large, most of the private equity transactions have been friendly,” said Mitchell Hollin, a partner at private equity firm LLR. “Public boards always have the ability to say ‘no.’ It’s really their decision to say ‘yes’ that has allowed for these successful transactions.”
Some firms are looking at building consolidated online marketing companies. If they do they could give them a little business immediately by improving their industry’s reputation.
One company that turned off from private equity is Morgan Stanley who is trying to raise $6 billion for a new fund. They were tired of Goldman Sachs having all the fun.
Billions pouring into private equity’s coffers gives the beast an insatiable appetite. For any non-Web 2.0 business financial salvation is hoping someone like Texas Pacific or Blackstone buys them. A rumor in the publishing world is the U.K.’s Pearson is on the selling block:
Shares in Pearson jumped more than 4 percent on Wednesday to their highest price since mid-2002 in hefty volume amid speculation over a private-equity buyout for the world’s largest educational publisher.
Details of a report in the weekly The Business magazine, due to be published on Thursday but noted by traders during the afternoon, singled out private-equity firm Kohlberg Kravis Roberts & Co. as a possible bidder.
A source familiar with the matter told Reuters, however, that KKR currently had no plans to bid for Pearson. The private-equity firm declined to comment.
KKR has “no plans” but all that means is their preliminary work isn’t finished.
The Business reports taking Pearson public would mean the sale of The Financial Times which could fetch just under $1 billion. News Corp., The New York Times, and Dow Jones could bite. The story notes analysts say Pearson’s academic publishing is its core which could mean it’s trade house Penguin could also be sold.
Last year The Economist (partly owned by Pearson) explained why private equity firms love media companies more than public markets:
Private-equity firms like media companies better than public markets do. Public markets love a growth story. Private equity appreciates cash flow. Radio and television stations and even newspapers throw off loads of cash, which private-equity firms can borrow against, using this leverage to repay their equity fast. That is true even of businesses whose cash flow is in long-term decline, such as newspapers, as long as the rate of decline is relatively predictable. The biggest risk in many of the current batch of deals is that the private-equity firms discover the cash-flow models to be less predictable than they thought, says Colin Blaydon of Tuck Business School’s Centre for the Study of Private Equity and Entrepreneurship.
The way things are going any distressed company is rumored to be in the sights of a private equity firm. They’re buying things left and right why not The Gap (GPS), a clothing chain that’s a staple to America’s malls? The AP’s Michael Liedtke writes the company “generates lots of cash and retains a well-known brand.” Plus, a buyout firm could make some bucks splitting off Old Navy or Banana Republic. Liedtke points out private equity likes retail with Neiman Marcus and Toys “R” Us in firms’ hands.
The New York Times‘ DealBook reports doubt over a buyout. One reason being The Gap doesn’t have the real estate that could be sold to pay for the buyout.
- Retail sales numbers started coming in. Christmas shoppers liked the sales which disappointing stores.
- Toys R Us had a good 2006 making their private equity overlords happy as well as corporate bond traders.
- Big web players like Google and Yahoo are petitioning the SEC to prevent the NYSE from charging them for real-time stock quote data. Like it’s that important for average investors. What day trader is using Yahoo Finance as their primary info source? A losing one.
The McClatchy Company which earlier this year bought Knight Ridder for $4.5 billion sold the Minneapolis Star Tribune to, you guessed it, a private equity firm for $530 million. Avista Capital Partners is the firm of the moment. In a press release McClatchy said Avista tried snagging the two Philadelphia newspapers earlier this year. McClatchy will use the cash to pay off debt from the Knight Ridder deal.
paidContent.org notes the “sale price is much less than the $1.2 billion McClatchy paid to buy the Star Tribune from Cowles Media Co. in 1998.” At $530 million the paper is a better growth prospect than at $1.2 billion. We’ll all wait and see how they’ll get growth out of rapidly-changing business.