" /> The IUF's Private Equity Buyout Watch: January 2009 Archives

« December 2008 | Main | February 2009 »

January 29, 2009

'Wonderful Time, Wish You Were Here': US Buyout Funds Positioning to Profit from Potential New Tax Breaks

"This is an absolute wonderful time" to be in the private equity business, Blackstone head Stephen Schwarzman has told Bloomberg. Blackstone is currently raking in fees "advising" insurance giant AIG on how to raise cash through selloffs in the wake of the gigantic 2008 bailout.

Blackstone and the other pe funds have been lobbying hard to shape the Obama administration's stimulus package, now headed for the Senate, to extract maximum benefit from possible tax relief provisions on cancelled debt.

The Senate version (different from the one that just passed the House of Representatives) would allow companies which use cash to buy back their debt in 2009 and 2010 to defer tax liabilities on the operation until 2011, and then to pay it back over a number of years. The ultimate cost to US public revenue is estimated at around USD 26 billion.

For US tax accounting purposes, savings on cancelled or reduced debt constitute taxable corporate income - an unwelcome liability at a time when the funds are desperately struggling with their sinking, heavily leveraged portfolio companies. Thus, for example, a pe-owned company which successfully exchanged one million dollars worth of debt for half a million in cash would owe tax on the 500,000 saved, which is treated as income. Taxed as income, it beats paying back interest plus principle, but it isn't easy to pull off, even with investors scrambling to save whatever they can.

In December 2008, for example, the TPG/Apollo-owned Harrah's Entertainment, the world's largest gaming corperation taken private for a premium price at the height of the LBO boom, reduced some of its debt by USD 1 billion. This was accomplished by persuading some bondholders to accept cash or swap existing debt for later maturing new bonds. Altogether, only a relatively small group of bondholders took up the offer. Harrah's continues to lose money and has USD 24 billion in long-term debt on its books, with 710 million due next year and 308 million due in 2011.

Bondholders have not only been reluctant to write off a significant chunk of their claims, some of have been fighting back, adding yet more litigation to the collapsing leveraged finance landscape. Apollo's attempt to refinance over USD 1 billion in debt at sinking real estate broker Realogy.(where interest payments on the buyout deal roughly equal annual revenue) was successfully challenged in the courts by investors holding senior debt (and therefore first to have a go at what's left of assets in the event of bankruptcy). Apollo had sought to exchange over 1 billion in outstanding bonds for new ones worth half as much. The lawsuit contended that the proposed swap would only "delay the inevitable failure of Realogy" and was essentially "fraudulent". The unsecured debt on offer, according to the suit, trading at less than 25% of its nominal value, "is all-but-worthless".

January 14, 2009

Breaking Up is Hard to Do: Investors Fleeing PE Commitments Pay the Price

Investors seeking to exit private equity commitments will pay a steep price, if Permira's terms set the standard.

SVG, the London-listed private equity fund of funds which is Permira's largest single source of capital, has cut its outstanding GBP 1.2 billion commitment to Permira's most recent buyout fund by GBP 800 million. The fund (now shrinking) was originally capped at around 12 billion. Hit hard by the rapid devaluation of Permira's portfolio companies on its own balance sheets, SVG simply had insufficient cash and credit available to meet their commitment, forcing it to cut back by redeeming its pledge while raising quick cash through a heavily discounted GBP 200 million rights issue.

Early withdrawal, however, doesn't come cheap. Permira announced in December that investors could redeem their pledges by as much as 40% - but would continue to pay full management fees based on the original commitment and renounce 25% of any returns. Many pension funds had been attracted to private equity funds of funds as an alternative to locking investments into illiquid direct stakes in the buyout funds.

Commenting on December 19 on the impact on Permira of a potential investor flight, the UK Guardian wrote: "Sources close to the firm [Permira] said there would be little impact on its ability to buy distressed companies or those that fit its existing portfolio. Until yesterday, only 55% of the £11.1bn IV fund was invested, giving the firm continued access to funds. However, it is understood the firm is in constant talks with banks backing its funds, after a decade-long buying spree that added 180 companies to its portfolio. Banks often agreed to lend five or six times the total equity used by buyout firms in major deals, much of which needs to be refinanced after a period of three-to-five years. SVG's decision to cut its outstanding liability to the fund from £1.2bn to £343m will increase the proportion of bank debt and send a message to the banks that tougher times lie ahead."

January 13, 2009

Debt Drives Premier Foods, Largest UK Food Group, into the Arms of…Private Equity

Struggling under a mountain of acquisition-induced debt, the UK's Premier Foods is reportedly seeking a large cash injection from private equity investors in order to shore up its wobbly capital structure and avoid breaching loan covenants.

The largest UK food group, with annual sales of close to GBP 2.5 billion and rising, Premier is weighted down with close to GBP 1.8 billion in debt stemming from its 2006 acquisition of the UK/Ireland piece of Campbell's (since rebranded) and, in particular, the GBP 1.2 billion purchase of rival RHM. The acquisitions were followed by massive restructurings, plant closures and job losses.

According to recent UK press reports, Premier's advisor Goldman Sachs is pushing them to opt for a "cornerstone" investor to inject hundreds of millions of pounds into the company, with private equity funds Bain Capital, Blackstone, Lion Capital and Permira mentioned as possible candidates. All of them are flush with uninvested capital.

Premier's debt stands at 9 times the company's current market capitalization and 4.5 times EBIDTA - which is to say, its financial structure is that of a leveraged buyout. Commenting on the 2006-2007 acquisitions in its 2007 annual report, Premier stated "We considered the majority of these businesses to be underleveraged in the existing business structure."

Premier was in fact owned by international private equity operators Hicks, Muse, Tate and Furst from 1999 until 2004, when it was listed on the London stock exchange. During that period Premier added to their portfolio castoffs from Nestlé (including Crosse & Blackwell, Branston Pickle and Chivers) and Unilever (Ambrosia) as well as cereal maker Weetabix (now with Lion Capital, who have loaded it with debt to reap dividend payments). When the dotcom/telecom bubble burst and Hicks, Muse Tate and Furst imploded, its European arm separated to form Lion Capital, now a major private equity investor in the UK food sector.

Premiere's massive debt stands as one measure of the imprint of leveraged finance on publicly listed companies. Another - the mirror image - is the prominence of high-ranking corporate food executives in the private equuity business. Lion Capital's web site "history", for example, informs us that "Javier Ferrán joined Lion Capital after a 20-year career at Bacardi, the last two years as the President and Chief Executive, and George Sewell joined Lion Capital after a 32-year career at Quaker Foods, the last nine years as the President of Quaker Foods Europe." Further, "In early 2007, Mohamed Elsarky joined Lion Capital following a 20-year career as a senior executive in the branded food sector, the last three years as the President of Northern Europe for United Biscuits. Also in early 2007, Mary Minnick joined Lion Capital following a 23-year career with The Coca-Cola Company, the last two years as the President of Marketing, Strategy and Innovation, with responsibility for strategic planning, marketing, all new product development, product quality, global advertising, media, packaging and equipment worldwide. These last two appointments further deepened Lion Capital's consumer expertise, which is unparalleled within other private equity houses." All part of financializing food…