Biggest Dividend

posted by Martin Howell on Jul 10

    After Blackstone Group announced its surprise $20 billion acquisition of Hilton Hotels  on July 3, it took just 89 minutes for UNITE HERE, a hotel workers union, to unequivocally endorse the deal. That’s 89 minutes to evaluate the proposal, come to a conclusion, put a release together, and distribute it. That’s a pretty fast turnaround. Moreover, it was a pretty bold statement.
    “We welcome this combination,” said Bruce Raynor, UNITE HERE’s general president. “This combination is good news for the workers.”
    “For the thousands of housekeepers, bellpersons, banquet staff, waiters and waitresses affected by this transaction, we are encouraged that two responsible actors are coming together,” chimed in John Wilhelm, UNITE HERE’s president for the hospitality industry.
    Unusual. No hint of caution for the prospective owners and no saber-rattling about the need to ensure workers rights amid the billions of dollars changing hands. And this strident labor support is for a deal involving Blackstone, which faced resistance from the AFL-CIO to its recent initial public offering.
    Unusual too, because UNITE HERE, an aggressive union, hasn’t always had the smoothest relations with Hilton.
    Two days after its endorsement of the deal, a grievance related to an employee’s firing at the Los Angeles Airport Hilton filed by UNITE HERE was thrown out by the National Labor Relations Board. The incident drew harsh words from the hotel’s management.
    “This is just another example of UNITE HERE local 11 ignoring fact and truth in their effort to bully our employees and this hotel,” said Grant Coonley, general manager at the LAX Hilton.
    In June, UNITE HERE said workers at a Hilton in Glendale, California, were escalating their campaign against the hotel’s owner Eagle Hospitality Properties Trust <EHP.N> by declaring a boycott of the Eagle-owned Embassy Suites — a Hilton chain — in Boston. 
    It was the ninth hotel that the workers called to boycott in a long-running dispute about what the union calls poverty wages, lack of affordable health insurance, and dangerous working conditions.
    In August 2006, union workers at six Chicago hotels run by Hilton authorized UNITE HERE to strike as labor contracts were due to expire.
    Also, UNITE HERE has faced allegations from its own rank and file. Grant Suzuki, an electrician at the Hilton Hawaiian Village Hotel, in May filed charges against the union after the union failed to disclose certain financial expenditures.
    “UNITE-HERE union officials are undermining the rights of the very employees they claim to represent,” said Stefan Gleason, vice president of the National Right to Work Foundation, a group that is representing Suzuki.
    On the other hand, UNITE HERE has wrapped up numerous labor contracts involving Hilton hotels, and last July, it and Hilton agreed on a deal that eased the hotel operator’s stance on union organization. The union also says it has had good relations with Blackstone, which also owns more than 100,000 hotel rooms including the La Quinta chain.
    “Normally, we’d have to talk to people in a situation like this to understand the directions and the implications, but in this case, because we know both companies quite well and have very good relations with both, so we were enthusiastic as soon as we heard about it,” said UNITE HERE’s Wilhelm.
    The union also didn’t get any head start on investors and the rest of us. “We heard about it that afternoon,” he said.
    
    (Reported and written by Chris Reiter)
    
   

posted by Martin Howell on Jul 9

    Pundits have been forecasting that the pending IPO of software maker VMware Inc. could be the hottest tech offering since Google went public in 2004.
    But investors who buy into the 11 percent stake of the software maker that EMC Corp is selling will find themselves with virtually no say in how the company is run.
    EMC has set up a dual-tier voting structure for shareholders to ensure this is the case. 
    It controls 300 million class B shares, each of which has 10 times the voting rights of the 75 million class A shares in the company. It’s planning to sell just 33 million class A shares in the IPO.
    At the end of the day EMC may only own 89 percent of VMware, but it will have a stunning 99 percent of the voting power.
    “EMC will have the ability to control all matters affecting us,” VMware said in its amended prospectus. It mentioned that those areas run the gamut from the selection of directors to setting corporate business plans, policies and M&A strategy as well as managing financing activities.
    EMC spokesman Michael Gallant said that his company was following the example of half a dozen other companies who had sold business units to the public.
    “This type of structure is normal in situations where a parent company is carving out a portion of a subsidiary,” he said, though he wasn’t immediately able to cite an example of others who had taken this route.
    Increasingly it seems companies are seeking to have it both ways — full access to the stock markets but without a lot of the baggage (such as shareholders’ rights) that used to go with it.  Private equity firm Blackstone Group, which went public last month, also came up with a structure that gave its shareholders precious few rights, and its buyout rival KKR is set to follow suit with its IPO later this year.  Perhaps we should have taken EMC CFO David Goulden more literally when he told the Reuters Global Technology, Media and Telecoms Summit in May that “if I could have my cake and eat it too, I’d like to take it public and not dilute (it).”

(writing by Jim Finkle)
    
 (picture: David Goulden at Reuters Summit in May)  

posted by Jonathan Keehner on Jul 9

If your Fourth of July week felt more like a five-day pyrotechnics display you can thank private equity — which this year celebrated our nations birthday with a buyout blitz.

Of a staggering $64 billion announced in deals targeting U.S. companies last week, nearly three-quarters were backed by private equity, according to Dealogic. To put these LBO fireworks in perspective, just $11 billion in deals were announced last year during the holiday week — of which only 7 percent was private equity driven. And in 2005 private equity backed 9 percent of the $18 billion in U.S.-targeted M&A announced during the first week of July.

The Dealogic stats are below.

The private equity onslaught — which accounts for over a third of all U.S.-targeted M&A announced so far this year — means deals are much bigger than in past: last week Blackstone agreed to acquire Hilton Hotels for over $27 billion, including debt, while Carlyle offered to shell out more than $6 billion for Manor Care.

It also means that until the buyout boom finally subsides, those on Wall Street may want to rethink Labor Day plans.

posted by Caroline Humer on Jul 9

Raising a bid to beat the highest offer is a typical strategy when two or more companies are in the middle of a bidding war for a company, but private equity firm Apollo has given the move a new twist.
It has used an unusual bidding tactic as it tries to beat out Dutch-based Basell for control of chemical company Huntsman – besting its own highest offer.
After coming in last week with an offer that was $2 per share higher than Basell’s at $27.25 – a number which Huntsman on Friday said was a superior bid – the private equity firm said on Monday it would pay another 75 cents per share for the company.
But Basell, which had offered $25.25 per share, had never even raised its bid in reaction to Apollo’s first move. Apollo had beaten itself. Apollo isn’t saying why it made the move.
M&A observers say that typically, companies raise bids in reaction to something.
“The only thing that I can think of is that they got wind that Basell was going to come back and match their bid,” said one arbitrage trader.
An M&A lawyer said that possibly there is something about the Apollo bid that makes it less valuable than it appears, or that shareholders have indicated the offer is not yet high enough. Although that sort of maneuvering often happens late in the process after an agreement has been reached – for instance Carl Icahn raised his offer for Lear on Monday to try to win over shareholders as the vote draws near.
So far, Basell has said little and a spokesman for Access Industries, which controls the company, said that it is considering its next move.

posted by Michael Flaherty on Jul 6

After a slow response to tax legislation aimed at private equity firms, the Private Equity Council tells Reuters that it’s gearing up for a fight. Better late than never.  

“Do I wish we had been doing it for ten years, absolutely,” PEC spokesman Robert Stewart told Reuters’ Rachel Younglai in an interview, referring to the group’s representation of the buyout industry in Washington. “But I think we are making some progress as we explain to members and staff, what are the principles behind this tax treatment to all general partnerships, not just private equity, and what some of the economic benefits are and what some of the economic consequences might be if the tax treatment were changed.”  

The council launched late last year, hiring Doug Lowenstein from his role defending the video game industry, and officially opened at the end of February. At the time, the private equity industry faced growing resentment from unions in Europe and the U.S., which focused their anger mainly on the issue of job losses. The negative press on the buyout industry was building, and executives at top LBO firms were pushing for a sort of trade group to represent them. Enter Lowenstein and Co.
    Preaching a kinder image of private equity was one thing, but within a month of the council opening for business, Blackstone filed to go public, and lawmakers pounced. By June, policians proposed bills to double the tax rate of private equity firms that go public and to impose a higher tax on a fund’s “carried interest” or the fund manager’s share of the profits from 15 percent to 35 percent.
    The Private Equity Council would be quick to react, one would think. But it turns out, they didn’t have much to offer. Lowenstein was out of town around the time news of the Blackstone Bill hit. The group didn’t even have a website then, and they still don’t.
    The response to the legislation was slow. Now, Stewart says the group is ramping up its efforts.
    The council, which represents some of the country’s largest firms like Blackstone, Apax Partners, the Carlyle Group and KKR, is on board with a coalition of Republican lawmakers and industry associations such as the U.S. Chamber of Commerce which oppose the bill. As well, it is “talking to many other people,” said Stewart.
    Stewart said the group was formed to educate and explain the ins and outs of private equity firms and it was formed “at a time when there wasn’t any particular tax issue around.” Now there is.

    Mind you, Lowenstein’s past utterances indicate he is far from a shrinking violet of lobbyists. 
    In a speech just before leaving the Entertainment Software Association for the job in private equity, he attacked some video game developers for producing controversial games and then not being prepared to defend them when critics turned on the heat. “Don’t duck and cover when the s*** hits the fan. Stand up and defend what you make,” he told them, according to Wired.com.
 
Henry Kravis, Stephen Schwarzman and friends beware. Don’t back down.
(Additional reporting by Martin Howell and Rachelle Younglai (correcting name))

(Photo: Doug Lowenstein, Reuters file)

posted by Michael Flaherty on Jul 6

Few media reports following Apollo Management’s efforts to buy Huntsman have mentioned the history between the two companies, which dates back at least to early last year.

According to sources, the relationship does not carry particularly fond memories. It ended last time with a deal falling apart. And while Huntsman has deemed Apollo’s current offer as “superior,” they’re still recommending Basell’s bid to shareholders. 
     
On Jan. 31, 2006, the Wall Street Journal reported that Huntsman was in takeover talks, with Apollo considered a leading candidate. Indeed, bankers later confirmed to Reuters that Apollo was bidding through its company Hexion Specialty Chemicals Inc. for the company. Huntsman’s stock jumped 11 percent on the news and led the company to confirm the talks.
    At the time, private equity firm MattlinPatterson owned about 35 percent of the company and Jon Huntsman and his family owned about 24 percent.
    The company did not identify the suitors, but did say it had retained Merrill Lynch and SG Cowen as financial advisers. 
     
    The following Sunday, Huntsman said it ended takeover talks, sending its stock down by as much as 12 percent. 
    Houston-based chemical producer Lyondell Chemical Co. and Access Industries’ Basell NV, the former plastics joint venture of BASF and Royal Dutch/Shell Group, were among the industry suitors, according to sources.
    But Apollo put in the highest offer, sources said, an offer just above the $22.95 its shares closed at on Friday. Huntsman wanted more than Apollo bid, the sources said, who added that a weak fourth-quarter outlook and antitrust concerns explained why Apollo didn’t want to lift its offer.
    The sources also said that there was a lot of ill-will between Apollo and Huntsman after the failed deal. 

    Fast forward to Wednesday, just two hours before the 4th of July began.
    Ill-will aside, Apollo offered $6 billion for Huntsman through Hexion again, the company said on Wednesday, a bid 8 percent higher than an offer Huntsman accepted from Dutch chemicals maker Basell on June 26.

    The bitter ending to Apollo’s offer last year obviously didn’t keep them away this time, but hard feelings likely linger.

 (Photo credit: Huntsman corporate website)
 
 
     
    

posted by Martin Howell on Jul 5

    KKR has crystallized the firm’s principles and values in its filing for an IPO. And it’s quite a touchy-feely revelation from Henry Kravis and co. — especially given KKR is the original buyout king and given the venomous attacks unleashed on the private equity industry in the past year or so. 
    The list, outlined below, begins with honesty and respect and ends with fortitude and sharing. “We believe in the importance of being fair, courteous and respectful to all,” is one declaration. The values are described by the firm as “a healthy antidote to overconfidence, internal politics and other behaviors that could jeopardize our long-term success.”
    It is a contrast to the negative image, the private equity industry has garnered in some circles. KKR, mind you, is among the main subjects in the best seller book about the 1987 takeover battle for RJR Nabisco, a book titled “Barbarians at the Gate.” Of course, major rival Blackstone Group also has “core beliefs” — but they don’t provide quite as much chicken soup for the takeover artist’s soul.

KKR’s Values  (from its IPO filing)

When our founders started KKR in 1976, leveraged buyouts were a novel form of corporate finance. With no financial services firm to model ourselves on and with little interest in copying an existing formula, we sought to build a firm based on principles and values that would provide a proper institutional foundation for years to come.

We believe that our success to date has been largely attributable to our culture and values. As we continue to grow, our future performance will depend on both our ability to protect and remain true to our culture and our willingness to hire new people with different work experiences. We believe that adhering to the following values is critical to extending our record of success:

Honesty.    We believe that integrity is the value upon which all other values are built. We are honest with one another and everyone with whom we work outside of our firm. We invest in companies and work with people with whom we are proud to associate ourselves.  

 

Respect.    We believe a collegial culture fostering a positive working environment benefits our firm as a whole. A guiding principle of our firm is to treat others as we would like to be treated. We believe in the importance of being fair, courteous and respectful to all.  

 

Teamwork.    We operate as a single worldwide team, working together to create the best outcome for our firm, our investors, the managers with whom we partner and other stakeholders. We seek solutions that benefit the businesses in which we invest, the people they employ and the constituencies they serve. We maintain a “flat” organizational structure in which our people help one another irrespective of where an issue or opportunity resides within our firm or our offices.  

 

Excellence and Innovation.    We strive to be the best at what we do. We believe that creativity is a competitive advantage and endeavor to put innovative ideas to work to solve problems. We are not afraid to assume prudent risks.  

 

Accountability.    We believe in the importance of firm-wide accountability. If an investment does not perform, we do not point fingers or assign blame. Rather, we collectively take responsibility, learn from our mistakes and improve our performance as individuals and as a team.  

 

Fortitude.    We believe in having the courage to say “no” to a dealeven at a late stageif we become uncomfortable with any aspect of the transaction.  

 

Sharing.    We share financial results throughout our firm and we share the credit for our successes. No one in our firm claims sole possession of any idea or successful transaction.

These values are easy to write down, but hard to live by. They are, however, a healthy antidote to overconfidence, internal politics and other behaviors that could otherwise jeopardize our long-term success. We do not intend to change our values or the way we conduct our business as a result of this offering. Indeed, we would not be proceeding with this offering if we felt that it would move us away from our principles. We believe that if we continue live by these values we will be able to maintain our industry leadership far into the future.

(Photo: Reuters file)

posted by Michael Flaherty on Jul 5

It was a big deal when Blackstone Group’s $4 billion IPO prospectus did not include two of the largest underwriters in the world–Goldman Sachs and JPMorgan. The two later garnered minor roles in the offering. 
    
History seems to be repeating itself–Goldman and JPMorgan were shut out of KKR’s $1.25 billion IPO filing as well. Citigroup and Morgan Stanley, the same underwriters that led the Blackstone IPO, are leading KKR’s too. 

When Goldman and JPMorgan were snubbed for Blackstone’s float, some sources familiar with the situation said that it may have been because they were working with another private equity firm on an IPO. A non-compete agreement of some kind may have come into play.

Is that at issue here, too? It’s hard to say but there may also be other reasons why KKR didn’t choose the two. To see a chart on top KKR bond underwriters click here.

JPMorgan does not have a private equity effort big enough to rival KKR, but Henry Kravis may have another beef with the bank. Reuters reported  in April that Henry Kravis and crew were fuming at the way JPMorgan handled its proposed takeover of  First Data Corp. Long story short, JPMorgan owns a majority stake in a First Data joint venture. KKR tried to reassure JPMorgan that the JV was not under threat, but JPMorgan pushed back, offering to buy out First Data’s 49 percent stake in the venture or dissolve the partnership altogether, sources told Reuters. That didn’t sit well with Kravis, sources say. 

Goldman does have a large private equity arm, and is a competitor to KKR and Blackstone, even though they have partnered on several deals. The largest private equity fund ever raised is Goldman’s more than $20 billion buyout fund. At the end of the day, Goldman is a rival to other mega-buyout firms. 

Goldman and JPMorgan declined to comment. 
    

(Photo: Henry Kravis, Forbes)

posted by Martin Howell on Jul 5

The KKR IPO filing doesn’t yet tell us whether Henry Kravis gets compensated as well as his rival, Blackstone’s Stephen Schwarzman (who pulled in almost $400 million last year) but it does tell us that the KKR partners are making more money out of their flying machines. The document says that KKR paid $6.5 million for the use of its principals’ aircraft last year with the payments based on market charter rates. It stresses that Kravis and colleagues paid for the aircraft themselves and bear all the “operating, personnel and maintenance costs associated with their operation.” Certainly, they appear to be doing better than Schwarzman, who owns an airplane, and Blackstone co-founder Peter Peterson who jointly owns a helicopter with Schwarzman. In 2006, Schwarzman got a mere $1.5 million from Blackstone for use of his plane, and the two of them got only $158,500 for use of the helicopter.

From KKR S-1

Firm Use of Private Aircraft 
 
        Certain of our senior principals, including Messrs. Kravis and Roberts, own aircraft that we use for business purposes in the ordinary course of our operations. They paid for the purchase of these aircraft with their personal funds and bear all operating, personnel and maintenance costs associated with their operation. The hourly rates that we pay for the use of these aircraft are based on current market rates for chartering private aircraft of the same type. We paid $6.5 million for the use of these aircraft during the year ended December 31, 2006. 
 

From Blackatone S-1

Firm Use of Our Founders’ Private Aircraft 
 
        Mr. Schwarzman owns an airplane and Messrs. Schwarzman and Peterson jointly own a helicopter that we use for business purposes in the course of our operations. Messrs. Schwarzman and Peterson paid for the purchase of these aircraft themselves and bear all operating, personnel and maintenance costs associated with their operation. The hourly payments we made to Mr. Schwarzman and Mr. Peterson for such use were based on current market rates for chartering private aircraft. We paid $1,544,320, $1,037,925 and $1,032,170 to Mr. Schwarzman in 2006, 2005 and 2004, respectively, for the use of his airplane and we paid $158,500, $306,210 and $198,905 to Mr. Schwarzman and Mr. Peterson in 2006, 2005 and 2004, respectively, for the use of their jointly-owned helicopter. 

(Photo: Reuters file)

posted by Martin Howell on Jul 5

There was a time when Corporate America would do its patriotic duty by taking a rest the afternoon and evening before the Independence Day holiday. If anyone had to say something they said it in the morning of July 3, allowing brokers, investors, journalists, advisers, rivals and all the other folks who have to engage with Wall Street and big business the chance to drive, fly or sail off for the holiday without getting blindsided by a major announcement. Only companies with really bad news and few scruples would announce anything late on July 3.

That apparently has all changed. On Tuesday, not only did Kohlberg, Kravis Roberts & Co file for an initial public offering at 5:19 pm New York time but then about 40 minutes later Hilton Hotels announced it had agreed to be bought by KKR’s arch-rival Blackstone Group for $26 billion including debt. To add insult to injury, at 10:11 pm Huntsman Corp. said it had received a $6 billion takeover proposal from a company controlled by private equity firm Apollo Management.

It is the private equity firms that are in all three cases either triggers of the announcements or those making the announcements themselves. The Blackstone-Hilton timing was more understandable than the others given Hilton’s shares had surged in the half-day trading session that day. As for Huntsman, maybe they got the counterbid at 9 p.m. and had to get it out, or maybe they had it earlier? Spokesmen for both Huntsman and Apollo declined to comment.

But KKR? What could possibly be behind putting a major company announcement while Wall Street was headed to the Hamptons–or there already. KKR’s outside PR firm, Kekst and Company, declined to comment.

So we’ll just have to be on notice — there is no such thing as sacred time anymore. Remember that when the Thanksgiving holiday comes around.