Were you wondering which sector of the U.S. economy would be next to take a dive from the year-old credit crunch? Well look no further, because Barron's [subscription required] reports that private equity firms like Apollo Global Management, Kohlberg Kravis Roberts, and Blackstone Group (NYSE: BX) are hurting gators thanks to too much borrowed money and the weak financial performance of the companies they bought. And business is way down, Barron's reports that through mid-August, the 2008 total deal volume "stood at $67 billion, versus more than $400 billion in the corresponding 2007 period."
This does not come as a surprise to me. In February 2007, I appeared on CNBC arguing that private equity had peaked. And I began to question its long-term viability back in August 2006 when Barron'sAlan Abelson quoted my thoughts on the matter. The basic problem is that when debt is cheap, private equity booms and when it starts selling itself to the public, investors should hold onto their wallets for dear life. People who own private equity firms tap their superior knowledge of the coming downturn to convince the public to bail them out by buying their stock.
Barron's cites -- as evidence of trouble in private equity land -- examples of the declining value of the publicly traded debt in companies that private equity took private at too-high prices with too much borrowed money. It writes that bonds of "many companies taken private in the past two years have plunged to 50 cents on the dollar or less, signaling that investors fear they won't be fully repaid. Many companies that were the subjects of buyouts a year or two ago are so grossly over-leveraged that they're struggling simply to pay interest. If they were to default, debt investors would be stung, but equity investors would be even worse off; the value of their holdings would be deeply impaired or wiped out."
Huntsman (NYSE: HUN), a chemical company, controlled by private equity investor David Matlin and Jon Huntsman, rejected Apollo Managements attempt to back out of merger a $28 cash merger agreement.
HUN is recently trading at $13.10 in pre-open trading, below its close of $20.86.
HUN overall option implied volatility of 82 was above its 26-week average of 48 according to Track Data, suggesting larger price risk.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Citigroup (NYSE: C) has a set of loans to music firm EMI. It had hoped to sell them as part of a $12 billion package of debt that it is unloading to several private equity firms including using Apollo and TPG. But, things at EMI have gotten so bad that buyers want the debt held out of the mix.
According to The Wall Street Journal (subscription required), "The fact that EMI's debt was pulled from the proposed sale suggests it would have attracted prices well below the upper-80s range the other loans command." The total value of the loan to EMI, made by Citi and several other banks, was $4.9 billion.
For Citi, the news has no silver lining. It will probably have to write-down a large portion of its piece of the debt in its first quarter. One of the lessons form the General Electric (NYSE: GE) earnings catastrophe is that March was a terrible month in the credit markets and many financial companies did not see it coming. Earnings for Citi and other banks and brokerages could be worse that expected, as they were at GE's financial groups.
No one should be surprised of Cit has to raise more money.
Douglas A. McIntyre is an editor at 247wallst.com.
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.
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.
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.
So, in this environment, it's understandable that Wall Street is jittery with buyout deals. Just look at the pending buyout of Clear Channel Communications (NYSE: CCU).
MOST NOTEWORTHY: Apollo Group, Zoran, AmSurg Corp, Apple and Tribune Co were today's noteworthy upgrades:
Baird upgraded shares of Apollo Group (NASDAQ: APOL) to Outperform from Neutral based on positive enrollment and revenue trends, margin improvement, and a strategic international announcement.
CIBC upped its rating on Zoran Corporation (NASDAQ: ZRAN) to Sector Outperformer from Sector Performer following strong Q3 results and guidance.
Jefferies upgraded shares of AmSurg Corp (NASDAQ: AMSG) to Buy from Hold as they believe the new CEO is preparing to drive earnings growth through acquisitions.
ThinkEquity continues to expect Apple (NASDAQ: AAPL) to outpace the industry in growth. The firm upgraded shares to Buy from Accumulate.
Barrington upgraded shares of Tribune Company (NYSE: TRB) to Market Perform from Underperform on valuation, as they believe the current price significantly discounts the risks of the going private transaction getting done.
The Wall Street Journal reports that KKR may pull its IPO [subscription required]. The reason? It's getting harder for KKR and its peers to get banks to offer cheap money for their deals. This chilling in the credit environment has caused the stock price of competitor, Blackstone Group (NYSE: BX) to tank and made it tougher for Apollo Management to extract money from investors.
At the risk of breaking my arm, I am going to pat myself on the back. That's because last Friday I posted here that I thought KKR should pull its IPO. And yesterday, Reuters picked up on this idea, quoting from my original post. This morning, the Journal published its article on the topic as well. It may be too early to say that private equity is on the down slope for this cycle -- I was certainly too early last August when I outlined some reasons why private equity may have peaked.
I think the deteriorating credit environment for private equity will be bad for stocks. In particular, it will hurt banks that cater to private equity firms. It will also take away a floor [subscription] that was keeping stocks from falling as there always existed the chance of being taken over by KKR and/or its peers. Today the markets may rebound initially -- Tokyo's Nikkei lost 2.4% -- but if credit dries up for private equity deals, look out below.
As I recently covered on BloggingBuyouts, the private equity firm Apollo Management hopes to go public only to institutional investors and "smart money" on a different type of exchange, Goldman Sachs's GSTrUE private trading system and a JPMorgan Chase platform. In doing so, the firm plans to bypass the extensive filing process that is required when a firm wants to become a public company on one of the main exchanges in the United States.
It turns out Goldman Sachs Group (NYSE: GS) and JP Morgan (NYSE: JPM) are essentially the only companies with these exchanges. However, according to a Financial Timesarticle, many investment banks such as Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER) plan to create their own exchanges of this type by September.
The FT article notes that this way of going public, also known as a 144A issue, is very popular with alternative investment managers because it allows them to raise permanent capital without filing to the extent necessary to file for an IPO. 144A issues can also be the first step used when a company plans to become fully public in time, such as the situation in Apollo.
MOST NOTEWORTHY: Heelys (HLYS), Audible (ADBL) and Response Genetics (RGDX) were today's most noteworthy initiations:
Baird believes Heelys (NYSE: HLYS) is poised to report strong results through FY07, which is not reflected in current valuation, and started shares with an Outperform rating and $47 target.
JMP Securities believes a growing number of consumers will opt to acquire books and physical CD audio books digitally over the internet and started shares of Audible (NASDAQ: ADBL) with an Outperform rating and $12.50 target.
Caris believes Response Genetics' (NASDAQ: RGDX) diagnostics opportunity may represent a significant long-term growth driver and initiated shares with a Buy rating and $7.50 target...
The Wall Street Journal (subscription required) reported that John Mackey, the CEO of Whole Foods Market Inc (NASDAQ: WFMI), used a pseudonym to blog about his company on Yahoo message boards for eight years, including panning rival Wild Oats Markets Inc (NASDAQ: OATS), which Whole Foods is trying to buy.
Carl Icahn's American Real Estate Partners new offer of $37.25 a share for Lear Corp. (NYSE: LEA), supported by the Lear board, has been rejected by proxy advisory firm Institutional Shareholder Service, reported the Wall Street Journal.
Barron's Online's (subscription required) "Inside Scoop" column reported that two institutional investors, Buckingham Capital Investment and Morgan Stanley, have sold about 3.2M shares of Build-A-Bear Workshop Inc (NYSE: BBW), as they feel the company won't get much more of a premium as a takeover target, if private equity is still even interested at all.
According to representatives from Congress, exclusivity deals like Apple Inc's (NASDAQ: AAPL) multi-year iPhone contract with phone provider AT&T Inc (NYSE: T) trap customers, forcing the users to stay with the providers as long as they want to continue using certain devices, reported AppleInsider.com.
The Wall Street Journal (subscription required) reported that Sprint Nextel Corporation (NYSE: S) is disconnecting about 1,000 customers who have been calling customer service "excessively."
The Financial Times (subscription required) reported that Moody's Corporation (NYSE: MCO), the credit rating agency, will issue a report today criticizing the private equity industry's increasing use of debt to buy companies.
The New York Post reported, citing sources, that theme park operator Cedar Fair Entertainment (NYSE: FUN) has contacted private equity firms about the possibility of acquiring the company.
MOST NOTEWORTHY: The educational services industry, the Latin American airlines sector, Asta Funding Inc (NASDAQ: ASFI) and Chipotle Mexican Grill Inc (NYSE: CMG) were today's noteworthy initiations:
Goldman Sachs initiated coverage on Copa Holdings (NYSE: CPA) with a Buy rating and $88 target, GOL Linhas Aereas Inteligentes SA (NYSE: GOL) and TAM SA (NYSE: TAM) with Neutral ratings and Lan Airlines SA (NYSE: LFL) with a Sell rating and $93 target; Lan Airlines was also initiated at Morgan Stanley with an Overweight rating and $105 target.
Asta Funding was initiated at Kaufman Brothers with a Buy rating and $55 target. The firm believes the company should grow earnings at a midpoint of 20% over time, with near-term growth at 15% and longer-term growth at 20%-25%.
Citigroup initiated shares of Chipotle Mexican Grill with a Buy rating and $100 target, as the firm expects the company will see unit growth at a rate in the high-teens while experiencing above-average SSS and some margin expansion.
OTHER INITIATIONS:
BMO Capital initiated shares of CDC Corp (NASDAQ: CHINA) with a Market Perform rating and $11 target.
Jazz Technologies Inc (NYSE: JAZ) was initiated with a Buy rating and $5 target at Wedbush Morgan Securities.
Were you wondering which sector of the U.S. economy would be next to take a dive from the year-old credit crunch? Well look no further, because Barron's [subscription required] reports that private equity firms like Apollo Global Management, Kohlberg Kravis Roberts, and Blackstone Group (NYSE: BX) are hurting gators thanks to too much borrowed money and the weak financial performance of the companies they bought. And business is way down, Barron's reports that through mid-August, the 2008 total deal volume "stood at $67 billion, versus more than $400 billion in the corresponding 2007 period."
Huntsman
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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.
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