Back in the summer of 2007, Apollo Management LP struck a typical private equity buyout. The deal called for paying $6.5 billion for Huntsman (NYSE: HUN), a chemicals company. In fact, the deal provided lots of synergy since Apollo already controlled a variety of similar businesses (through an entity called Hexion).
Well, of course, this was the peak of the private equity boom – and the credit markets began to unwind fairly quickly. What's more, the fundamentals of Huntsman started to weaken.
As a result, Apollo tried to extricate itself from the deal. And this meant a tough litigation fight.
Of course, this can be pretty a dicey thing. That is, the Delaware court ruled against Apollo and there was an order to get the deal done.
Yet again, this was bad news for Apollo (which has other faltering deals, such as Linens 'N Things). Actually, some of the top private equity firms have been taking some major hits lately, such as the TPG Group with its Washington Mutual (NYSE: WM) disaster.
So, to deal with the court ruling, Apollo has agreed to pony up $540 million to close the Huntsman transaction. Interestingly enough, Apollo has also agreed to give up its lucrative fees (amounting to $100 million or so).
This means that Huntsman should be on firm footing (especially in terms of its solvency). And, something else: the banks on the deal – which include Credit Suisse and Deutsche Bank – will have to raise the necessary funding, which will likely mean losing several billion on the transaction.
GSTrue, which is operated by Goldman Sachs (NYSE: GS), is a new-fangled marketplace to trade privately-held interests. One of its high-profile listings is Apollo Management LP., a top-tier private equity firm.
Unfortunately, the shares have lost more than 40% over the past year. Of course, this has been the treatment for many other private equity players because of the severe credit crunch.
According to the latest quarterly report, Apollo suffered a loss of $96 million, compared to a net profit of $144 million in the same period a year ago. The internal rate of return (IRR) fell from 42% to 21% over the quarter.
Moreover, Apollo is involved in litigation on its botched deal for Huntsman Corp (NYSE: HUN). And there was a 20% write down on the investment in Harrah's.
Despite all this, Apollo still appears to be on track for an IPO – to be listed on the New York Stock Exchange. Don't expect it to be easy.
Rexnord Holdings has been busy with dealmaking over the past few years. For the most part, the company is an amalgam of $1.3 billion in M&A deals.
In 2006, Apollo Management bought Rexnord from The Carlyle Group. Seven months later, Rexnord merged with Zurn. And things aren't over. Now, Rexnord has filed to go public.
Basically, there are two key pieces to the company. First, there is the power transformation division, which manufactures gears, bearings, seals and conveying equipment. Next, Rexnord has a water management division. This involves the handling of professional grade plumbing and water control products.
About 85% of the total sales of Rexnord come from products where it has the leading market share positions.
A key to Rexnord is its strong distribution network. For example, the power transmission business has more than 400 distributor customers and 2,200 branches. As for the water management part, there are 550 independent sales reps.
For the year ended March 31, 2008, Rexnord posted net sales of $1.9 billion and adjusted EBITDA of $382.7 million. Since 2004, the growth rate for sales has been about 27% (when you include acquisitions).
The proposed symbol for Rexnord's IPO is "RXN." What's more, you can locate the prospectus at the SEC website.
As it prepares to report its first quarter results, Lehman Brothers Holdings Inc (NYSE: LEH) may need to raise $3B to $4B to support its balance sheet, meaning its first quarter loss could be higher than the anticipated $300M, according to the Wall Street Journal. The capital raise would likely be through new common shares.
Yahoo! Inc (NASDAQ: YHOO) shareholders are suing the company over an employee severance plan they say was intended to help block its takeover by Microsoft Corporation (NASDAQ: MSFT), adding between $462M and $2.1B to Microsoft's costs,the Wall Street Journal reported.
The Financial Times reported that Momentive Performance Materials, a company owned by private-equity firm Apollo Management, has exercised its option to suspend cash payments on part of its debt.
As manufacturers push to compete in the "netbook" category, Intel Corporation (NASDAQ: INTC) admitted to shortages of its Atom microprocessor. In an interview with with the Financial Times, Intel's executive vice-president, Sean Maloney, said the company had received more orders than expected for the low-power processor.
Chemtura Corporation (NYSE: CEM), a chemical company, is the result of a merger of Crompton Corporation and Great Lakes Chemical Corporation back in 2005. Since then, the company has been "right-sizing" and "right-shaping" its organization with divestitures as well as more acquisitions. Some of the company's core competencies include plastic additives, seed treatments, pool and spa products, and urethane polymers.
Well, according to a report in The Wall Street Journal [subscription], it looks like The Blackstone Group LP (NYSE: BX) and Apollo Management LP are interested in purchasing Chemtura. True, it sounds like the talks are preliminary; but at the same time, private equity firms are hungry for deals, especially for valuations of $2 to $4 billion.
Blackstone and Apollo are highly experienced in the chemical space, and have had fairly good success. If anything, Chemtura is likely to find synergy with other portfolio companies.
Last December Chemtura Corporation (NYSE: CEM), a specialty chemicals company with a market cap of about $1.9B, said it might sell itself, and now The Blackstone Group LP (NYSE: BX) and Apollo Management are in talks to buy the company, the Wall Street Journal reported.
In part one of a series to help explain the reasons why The Bear Stearns Companies (NYSE: BSC) collapsed, the Wall Street Journal said that the troubled firm was torn apart by executives who couldn't agree on what course to take, including raising capital and slicing mortgage and related bonds from its inventory. And each of about six attempts to raise capital fell part.
OTHER PAPERS:
The American investor and Berkshire Hathaway Inc (NYSE: BRK.A) chief Warren Buffett said the United States is already in a recession that is deeper and will last longer than the public expects, the Economic Times reported.
According to the Telegraph, Barclays Plc (NYSE: BCS) is planning to sell Barclays Life Assurance Company, its life assurance arm, which has over GBP7B of funds under management. Sources believe potential bidders for the unit may include Pearl, Swiss Reinsurance Company (OTC: SWCEY), General Re, Canada Life and XL Re. Market commentators believe that on an embedded value basis, the unit is currently valued at around GBP1B.
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.
Back in February 2006, Apollo Management purchased Linens 'n Things for about $1.3 billion. At the time, it looked like a sensible deal. After all, the company has a strong retail format (for home textiles, housewares and so on). What's more, there are over 500 stores in 47 states.
However, with the slowing economy – especially in the real estate sector – things have turned sour. In fact, according to the Wall Street Journal [a paid publication], it appears that Linens is planning a bankruptcy filing and has hired Conway Del Genio Gries, which is a top advisor on restructurings.
For Apollo, this will certainly be a black eye. Keep in mind that the firm has recently filed to trade on the NYSE. Plus, if there is a bankruptcy, it is likely to mean a significant reduction in the equity value of Apollo's investment in Linens.
When creditors sense trouble, things can get particularly bad for retailers. Basically, they will often hold back on shipments or require cash upfront. Plus, Linens has a $15 million debt payment due on Tuesday. And if it doesn't pay it, it looks like that will be the day the company will file for bankruptcy.
According to people familiar with the matter, the Wall Street Journal reported that home-furnishings retailer Linens 'n Things, acquired by Apollo Management in 2006 and caught by a shrinking housing market and increasing debt load, is expected to file for Chapter 11 bankruptcy-court protection by Tuesday.
The United Auto Workers union notified General Motors Corporation (NYSE: GM) of its deadline to strike three factories in Michigan if the two are unable to agree on local labor pacts, the Detroit News reported.
The Business Standard reported that Toyota Motor Corporation (NYSE: TM) is planning to invest Rs 1,400 crore in Toyota Kirloskar Motor, its India subsidiary to set up its second plant in the country.
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.
With reports that Citigroup (NYSE:C) is close to selling off some $12 billion of leveraged loans and debt, the banking giant is taking a painful but very important step in cleaning up its financial situation. According to Reuters, "The sale would be to private equity firms including Apollo Management, Blackstone (NYSE: BX) and TPG, at an average price slightly below 90 cents on the dollar."
This is important for Citi for two reasons. First, they will end up with about $10 billion in cash to help them get through these tough times. Secondly, the price that they are getting for these bonds is shocking. Who would have dreamed that they could get a little less than 90 cents on the dollar.
Another interesting point is that the private equity group TPG is involved. As my colleague Zack Miller posted yesterday about its investment in Washington Mutual (NYSE:WM), TPG must believe that the banks have bottomed out. Why else would they be ponying up tens of billions of dollars?
It seems to me that we are at or very near the bottom for bank stocks. Long-term investors looking for a turnaround play may want to take a look and do some analysis of the banking sector.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/9/08.
In an effort to increase sales in the Middle East, the Wall Street Journal reported that Dell Inc (NASDAQ: DELL) is in talks with a government-owned vehicle in Dubai called Tecom about establishing a joint venture.
The Wall Street Journal also reported that Washington Mutual Incorporated (NYSE: WM), which obtained a $7B capital infusion from TPG and other investors, had reportedly been working on the TPG deal while negotiating with JP Morgan Chase & Co (NYSE: JPM), which made a preliminary takeover bid of about $7B, people familiar with the deal said.
Citigroup Incorporated (NYSE: C) is close to reaching a deal to sell $12B in leveraged loans at a discount to a group of leading private equity firms, the Financial Times reported. Although details of the deal were still being worked out, inside sources said Apollo Management, The Blackstone Group LP (NYSE: BX) and TPG would buy the loan portfolio at a discount that could come in at about 90 cents on the dollar.
OTHER PAPERS:
The UK Times reported that The Boeing Company (NYSE: BA) is today expected to announce that its 787 Dreamliner has been delayed by 18 months, a setback which will affect all airlines that have ordered the 787, including British Airways Plc (OTC: BAIRY) and Virgin Atlantic.
The latest issue of Barron's is suggesting that investors may want to look at beaten down, debt-laden companies(subscription required):
Blackstone Group, Apollo Management and the rest of the private-equity crowd may be sidelined by the mess in the credit markets, but investors still can play at their game by purchasing shares of debt-laden companies in the public markets.
Barron's goes on to suggest that, if credit markets stabilize, some companies with heavy debt loads will rebound well. I don't dispute this analysis but I also don't think most investors should go chasing companies with big debt loads. It's always struck me as being somewhat akin to tiptoeing in front of steamrollers to pick up a penny. I've never bought shares of a company with a lot of debt. Sophisticated investors with an ability to really understand the debt, how it's structured, and the risks that go with it may do well with these companies. But if that isn't you, I think your best bet is to stay away.
As Barron's warns, the ultimate danger with investing in heavily leveraged companies is bankruptcy. If you're a disciple of Warren Buffett's first and second rules of investing -- don't lose money and don't forget rule number 1 -- this probably isn't a game you want to be playing.
It appears that Ford (NYSE: F) may finally have a buyer for Jaguar and Rover. The Wall Street Journal reports that Indian conglomerate Mahindra & Mahindra will tie up with private equity operation Apollo Management to buy the car units. Not all of the roadblocks to the deal have been pushed aside. The Journalwrites "Labor leaders in the United Kingdom are seeking assurances that the brands' new owner would protect jobs and factories in the country."
Ford paid a little over $5 billion for the two units, and industry estimates put their current value at $1.5 billion. So the sale would mark another step in the humiliating downsizing of Ford.
The probability of a sale also raises an interesting question. If Ford's management is so much better than it was a year ago and it has a much better labor deal with the UAW, why sell the units at all? If a company in India can improve the fortunes of the two brands, why can't Ford?
It is not too late for the No.2 U.S. car company to work on fixing the units itself. The poor results of Jag and Rover are already in the stock. Improving their results ought to help shareholder value.
Douglas A. McIntyre is an editor at 247wallst.com.
Back in the summer of 2007, Apollo Management LP struck a typical private equity buyout. The deal called for paying $6.5 billion for Huntsman (NYSE: HUN), a chemicals company. In fact, the deal provided lots of synergy since Apollo already controlled a variety of similar businesses (through an entity called Hexion).
GSTrue, which is operated by 
Rexnord Holdings has been busy with dealmaking over the past few years. For the most part, the company is an amalgam of $1.3 billion in M&A deals. 
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