News

Private Equity in Brief – 12 July 2007



Private equity funds hold investments in companies that are not listed on a public stock market. PE funds attract investors like pension funds, but also borrow high-risk money (junk-rated loans) to buy out companies, loading them with debt. They usually control management and, on acquiring a company, often bring in a new team of managers. During the few years they keep a company, PE funds seek to maximise profits and to pump up the company’s value for resale, merger or liquidation – often with scant regard for labour rights, jobs and conditions. Without trade union pressure, even a strong CSR culture is unlikely to survive.



“Private equity: the beat goes on” is the title of a recent CNNMoney.com article by Grace Wong. It points to “stunning announcements” by two of the world’s most powerful PE buyout firms, referring to recent moves by Blackstone and KKR reported below. Wong writes: “While the rising cost of debt has raised concerns that the best days of the buyout boom are past, the recent announcements send a clear message: private equity firms - at least the most powerful ones - are here to stay.” Quoting London-based research firm Private Equity Intelligence, Bloomberg reported that private equity firms raised a record $260 billion for new investment funds worldwide in the first half of 2007, topping the previous $237 billion record set in the second half of last year. Goldman Sachs Group Inc. and Providence Equity Partners Inc. led a dozen firms that raised funds of more than $5 billion during the period. More big funds are expected to be filled by the end of the year, reports FinancialNewsOnline. The largest is KKR’s global buyout fund, which is targeting $16.6bn. The US firm is also raising a €7.7bn ($10.4bn) Europe-focused fund. Apax Partners, a European private equity firm, is targeting €8.5bn in commitments. But some observers warn that the buyout boom is coming to an end. “I think the valuations are being pushed to levels which don't allow much more room; this kind of boom cannot go on forever,” Paul Myners, chairman of Guardian Media Group, told Thomson Investment Management News. “I think some of the deals are being done now with reckless capital structures.” CNNMoney.com, 4 July ’07; Bloomberg, 3 July ’07; AFX News Limited, 3 July ’07; FinancialNewsOnline US, 3 July ’07.



US private equity group Blackstone plans to buy the global Hilton Hotels chain for $26 billion. Under the agreement announced 3 July, Blackstone is to acquire Hilton stock for $47.50 per share, a 40% premium over the previous day’s stock price. Stephen F. Bollenbach, Hilton's co-chairman and chief executive officer, said: “Our priority has always been to maximize shareholder value. Our Board of Directors concluded that this transaction provides compelling value for our shareholders with a significant premium.” The deal still needs the approval of Hilton’s shareholders. Blackstone views Hilton as an important strategic investment, and no significant divestitures are envisaged as a result of the transaction. Blackstone already owns more than 100,000 hotel rooms in the United States and Europe, ranging from limited service properties such as La Quinta Inns and Suites to LXR Luxury Resorts and Hotels. Blackstone said it was committed to investing in Hilton “to grow and enhance the business. … We look forward to working with Hilton's management team and employees." Hilton Hotels Corporation is a leading global hotels company, operating in 76 countries and territories, with 105,000 employees worldwide and $8.2 billion revenue in 2006. UNITE HERE, the trade union that represents over 100,000 hotel workers throughout North America, has welcomed the deal. Bruce Raynor, General President of UNITE HERE said: "We enjoy a positive partnership with Hilton Hotels. And, for its part, Blackstone has demonstrated its commitment to fair treatment for thousands of hotel workers in several major markets. This combination is good news for the workers of what will be the largest hotel owner in the world." Hilton News Release, 3 July ‘07; UNITE HERE via PRNewswire-USNewswire, 3 July ’07; BBC NEWS, 4 July ’07; data from CNNMoney.com.



BECTU, the 26,500-member UK media union, has expressed concern over reports that Virgin Media, a cable-tv and telecoms group, is the target of a private equity buyout. “In the event of a buyout, we will be seeking assurances from the new owners regarding members' jobs,” said BECTU (Broadcasting Entertainment Cinematograph and Theatre Union). Reports said 2 July that Virgin Media Inc. had received a buyout offer worth £5.5 billion ($11.35 billion). Though the company refused to reveal the suitor or terms, sources said the offer was made by the Carlyle Group, a leading private equity firm based in Washington D.C. Virgin Media had begun a review to explore "strategic alternatives," including a possible sale. The company, in which British entrepreneur Sir Richard Branson holds a 10.5% stake, said "there is no assurance that any transaction will occur”. Born from a combination of cable operators NTL Inc. and Telewest and the mobile operator Virgin Mobile, the company reported its seventh consecutive quarterly loss in May, as subscribers are defecting to rival satellite service BSkyB. Virgin Media has launched legal action against BSkyB, 39%-owned by media tycoon Rupert Murdoch’s News Corporation, accusing it of “continued use of dominant market power to suppress competition”. Virgin Media was formed to create Britain's first "quadruple play" service, offering mobile phone, fixed-line phone, Internet broadband and TV services. It has invested heavily, and has £6 billion of debt. BECTU says its members at Virgin Media have already seen tremendous change over the last few years, with extensive redundancies. If it were to go through, the proposed deal would be the second biggest takeover of a British business by private equity, after the buyout of Boots, the pharmacy retail chain. It is reported that other private equity firms are considering their own offers for Virgin Media, whose owners, including owner-directors, may be hoping for a share-boosting bidding war. BECTU website; AP via Newsday.com, 2 July ’07; BBC NEWS, 3 July ’07; The Guardian, 4 July ’07.



Kohlberg Kravis Roberts (KKR), a top US private equity firm, plans to raise as much as $1.25 billion by selling shares on the stock market in an initial public offering (IPO). The money will be used to expand and to finance company buyouts. Founders Henry Kravis and George Roberts, both 63, would not sell any shares, the firm said. This is in contrast to Blackstone Group chiefs Stephen Schwarzman and Peter Peterson, who pocketed $2.56 billion in that firm's IPO in June. By the first week of July, Blackstone Group’s share price had dropped 4.1%. KKR’s recent deals include the proposed buyouts of TXU Corp, an energy company, and First Data Corp, electronic commerce and payments, which would be the two biggest ever US private equity transactions. As with Blackstone, investors buying KKR shares will have no control of the firm's management and will not vote in the election or removal of its directors. Mr Kravis and Mr Roberts, his cousin, created the firm that bears their names, along with Jerome Kohlberg. Mr Kohlberg later left and started his own buyout firm, Kohlberg & Co. Founded in 1976, KKR is one of the oldest private equity firms, and is known for high-profile deals such as the hostile takeover of RJR Nabisco for $31 billion in 1989, inspiring the bestseller, Barbarians at the Gate. AP via Newsday.com, 4 July ’07; Bloomberg via theage.com.au, 5 July ’07; SEIU data.



BCE’s fate sealed? BCE, Canada’s largest communications company, announced 30 June that it had reached an agreement to be acquired by a consortium of private equity firms led by Teachers Private Capital, the private investment arm of the Ontario Teachers Pension Plan. Its consortium partners are two US private equity firms: Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. The all-cash transaction is valued at C$51.7 billion ($48.5 billion), the largest buyout in Canadian corporate history. The proposed purchase price per share represents a 40% premium, delivering “substantial value creation for our shareholders,” said BCE. The PE consortium referred to its commitment to BCE’s growth potential through investment, and said senior management would continue to direct the company from its headquarters in Montreal. The deal still needs to be approved by shareholders and regulators. It was reported that, to fully finance the deal, the consortium’s bankers were planning record-setting debt financings, including the biggest ever junk bond sale by a Canadian company. BCE’s credit rating may plunge, forcing many Canadian mutual funds to sell their BCE bonds because of requirements forbidding them to hold debt that is below investment grade. It was also reported that Telus Corp., the Vancouver-based communications company, had not abandoned its hope of buying BCE. CEP – the Communications, Energy and Paperworkers Union – is concerned about jobs and benefits reductions. Union vice-president John Edwards is reportedly also disappointed at the prospect of BCE going private and is hoping Telus Corp. will make a hostile takeover bid, while noting that would have a serious impact on employment too. BCE News Release, 30 June ’07; globeandmail.com, 2 July ’07; globeandmail.com, 7 July ’07.



UK to move on PE tax and transparency? Britain's finance minister has suggested he may use his first budget to rein in the tax breaks enjoyed by the rapidly expanding private equity sector. In a talk with The Guardian, Alistair Darling said the tax system had to be fair, but that he would not take any knee-jerk action just to get a headline. "There are examples where private equity has brought money in and helped people restructure and carry on trading,” he said. “Of course, the tax system has to be fair, but before you change it you have to have regard to what the consequences will be.” In an interview with the Financial Times, the Chancellor said that people were also concerned about transparency. “People want to know what you’re up to; they want to be able to say, okay, this is a new owner, who is it? How is the company structured? What are the risks that I as an employee, or I as a possible investor might be exposed to?” The opposition Conservative Party has already suggested that it would raise tax levels on private equity firms. In a recent interview quoted in the Evening Standard, the shadow chancellor said: “I want the tax system to make sure that what looks like income, what walks and talks like income, is taxed like income.” Some private equity executives have also accepted they will have to lose some tax breaks. The Guardian, 10 July ’07; FT.com, 3 July ’07; Evening Standard via thisismoney.co.uk, 4 July ’07.