Archive for April 17th, 2008
Filed under: Financials and analyticals, Raising money, Private equity industry
BusinessWeek reports that The Bear Stearns Companies (NYSE: BSC), which reported earnings today, is behind $10 billion worth of Collateralized Debt Obligations (CDOs) at Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC). It all comes down to yet another new word to add to your financial vocabulary — Klio Funding — a brand of CDO that enabled Bear to sell to the $2 trillion money market fund industry.
What is Klio Funding and how did it cause all this damage? Klio Funding is “an entity” that sells Commercial Paper (CP) — short-term loans — and uses it to purchase higher-yielding long term investments. Since Citigroup had concurred to refund investors’ initial stakes plus interest — through liquidity puts — money market funds that bought Klios thought they would get higher yields at low risk.
Meanwhile, Ralph Cioffi — who headed up three Bear hedge funds which eventually folded — used money raised from the Klios to purchase CDOs and to lock in year-long financing for his hedge funds. This is significant because hedge funds typically can only borrow money for weeks at a time due to their risk. Cioffi’s CDOs were popular, raising $100 billion.
The Klio structure turned out to be a pyramid scheme according to Yale University economist Robert J. Shiller. As new investors arrive to the celebration, they bid up prices, boosting returns for those who got in earlier. The large gains attract more investors, and the cycle continues — as long as the players don’t try to take out their money en masse.
That’s exactly what happened this spring. Cioffi tried to sell more CDOs to raise money to prop up the hedge funds he managed. But just after raising $4 billion in Might, his hedge funds imploded, wiping out $1.6 billion of investors’ money. In November, Citigroup and Bank of America wrote down some $10 billion in CDOs thanks to their liquidity puts. The financial system faces at least $500 billion in write-downs — creating a big capital hole that needs to be filled.
The lesson for investors is clear. If you hear lots of new vocabulary words coming out of Wall Street, someone is making massive amounts of money in the short-term that’ll eventually blow up, leaving others to pay the costs. If you’ve invested in something with a name you don’t comprehend, find out what it is. If it sounds too good to be true, it probably is.
We already know that James Cayne, Bear’s CEO, is paying the price by not getting a bonus. The question is whether he’ll be able to keep his job.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in the other securities mentioned.
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Filed under: Rumors, Financials and analyticals, Engagements
 Earlier this month, rumors hit the market that United Airlines (NYSE: UAUA) and Delta Air Lines (NYSE: DAL) were considering a possible merger. Shortly afterward, Delta officially denied the rumors, but not surprisingly, United Airlines CEO Glen Tilton didn’t deny that they were considering merger options, as many industry analysts believe that United is the perfect company for a possible merger.
The airline, which took flight in 1930, filed for bankruptcy following the 2001 terrorist attacks and has appeared to be preparing for a sale ever since emerging from its bankruptcy proceedings. United came out of bankruptcy last year, but the company is still up to its eyeballs in debt, and boasts a miserable 2% profit margin over the past year.
When looking at United a couple of factors jump out at you pointing to the notion that the company feels a merger is the ideal avenue to explore:
- Unlike most of the other massive airline companies, United has decided not to add to its fleet. Currently the company has 460 jets in its fleet and it plans to rely on this existing fleet until 2015 or 2016. By this time, the company’s planes will have an average age of twenty years. According to the company’s official statement, it is just waiting for the next generation of planes, but to industry insiders this is a red flag that the company is trying to make sure it remains as favorable as possible to a takeover, and a long list of plane orders won’t help that goal.
- The company has been looking at ways to get as much debt as it possibly can off the table. It is considering the possibility of selling off its frequent flyer program, worth about $7.5 billion. Think about that United currently has a market cap of slightly under $5 billion.
- It is also considering the sale of its partial ownership in its maintenance operations along with a possible sale of its cargo business to private-equity investors, bringing in billions in cash and, once again, making the company more favorable to a possible buyer.
Industry insiders have estimated that after the possible spin-offs, the company’s stock value could balloon up towards $80 a share. That would be right at a 100% jump from its current selling price of $40.15 a share.
What are your thoughts? Should United look for a favorable suitor?
[Photo: Tsch
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Filed under: KKR, Financials and analyticals
Back in late September, KKR closed one of the largest buyouts in history - the $29 billion transaction for First Data, which is a leading payments processing operator.
Although the company is private, it is still publishing its financials and is having quarterly conference calls. So how are things going?
For the first nine months of 2007, revenues increased 15% to $5.9 billion and adjusted EBITDA was $1.8 billion (up 7%).
In fact, First Data’s new CEO, Michael Capellas, also provided his go-to-market strategy - shedding some light on what happens in post-buyout environments.
First of all, he wants to find ways to increase organic growth. To this end, there will be more emphasis on bolstering the sales force - as well as finding ways to cross-sell offerings.
Next, the company wants to bring new product innovations to market (hey, it means more cross-selling, right?) Some of the areas include mobile ecommerce, analytics, and fraud detection.
Another massive opportunity is the growth in emerging markets. Interestingly enough, Capellas is not looking for acquisitions to bulk things up on this front.
Finally, Capellas will try to cut lots of costs. Going into 2008, he thinks he has the ability to slash $200 million in annual costs.
And, this means layoffs - about 6% of the workforce. Yes, some things never change.
Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar On the web Guide to Decoding Financial Statements
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Filed under: Financials and analyticals
 There was lots of trepidation on the eve of Fortress Investment Group’s (NYSE: FIG) Q3 earnings report yesterday. After all, Blackstone (NYSE: BX) disappointed the Street.
Well, there was some relief (it also helped that there was a huge rally in equities). The company, which operates private equity and hedge funds, posted a net loss of $38 million, or $0.52 per share in Q3. Even though, if you strip various elements — such as certain tax and compensation — the firm earned $111 million, or $0.19 per share (which is known as pretax distributable earnings).
It was a relief that Fortress indicated there was little exposure to the subprime mess. If anything, the firm sees opportunities in the sector.
In fact, Fortress has some large plans. The firm is in the process of raising funds, with assets of $10 billion to $15 billion. The initiatives will range from infrastructure, commodities, emerging markets and Asian real estate.
What’s more, Fortress had a nice realization on its Crown Castle investment. The original investment came in 2002, which involved an initial $120 million stake. The total proceeds since then? A cool $1.7 billion.
Yes, it’s a reminder that the private equity business can be very enticing indeed.
Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar On the web Guide to Decoding Financial Statements . He also operates DealProfiles.com.
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Filed under: The Blackstone Group, Financials and analyticals
The wizards of Wall Street seem only to generate losses lately. Take the premier substitute asset firm, Blackstone (NYSE: BX). On yesterday’s Q3 earnings report, the stock fell 8%. Weren’t these the folks supposed to have the Midas Touch?
Well, Blackstone’s Q3 was actually respectable in light of the severe credit crunch and financial instability. Revenues increased 14% to $526.7 million and economic net income (NEI) was $299.2 million, which is adjusted for income taxes and equity compensation.
But as Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and Bank America (NYSE: BAC) clean up their mortgage mess, there is prone to be a void for lending on huge transactions. Unfortunately, Blackstone’s chief offering officer, Tony James, has no idea when this things will clear up but did call the situation a “black hole.” In fact, the problems seem to be spreading into Blackstone’s commercial real estate business, which saw a 44% drop in revenues to $109.1 million.
So in the meantime, Blackstone plans to focus on smaller deals, minority investments and even long positions in mortgage investments. After all, black holes can ultimately turn into good investments, right?
Keep in mind that Blackstone has been around for roughly 20 years and has seen various disruptive market cycles. The experience might payoff. According to the conference call, James indicated that the firm has focused its portfolio on defensive categories, such as on companies in healthcare, consumer products and healthcare. There has also been a focus on Asia, which should get a boost from the $3 billion investment from the Chinese government.
What’s more, when the private equity market got frothy early this year, Blackstone remained disciplined. James stated that Blackstone lost the bids on 90% of potential deals.
So as a public company and billions in fresh capital, Blackstone is positioned nicely to capitalize on financial wreckage. True, it may take some time to get returns. Then again, when it comes to investing in substitute investments, the strategy is to take the long view. And as seen with the history of Blackstone, it has worked quite well.
Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar On the internet Guide to Decoding Financial Statements
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Filed under: Deals, The Blackstone Group, Rumors, Financials and analyticals, Engagements, Private equity industry, Investments, Public or private?
 Allegheny Tech (NYSE: ATI) is recently up $2.60 to $96.83 on renewed buyout chatter. ATI, a diversified specialty metals producer, has a market cap of $9.4 billion. ATI November 105 calls have traded 155 times on transaction volume of 2,017 contracts, above its open interest of 1,813 contracts. ATI November 95 straddle is priced at $7.50. ATI December option implied volatility of 53 is above its 26-week average of 43 according to Track Data, suggesting bigger price risks.
Alliance Data Sys (NYSE: ADS), a provider of loyalty and marketing solutions derived from transaction-rich data, announced on 5/17 it would be acquired for $81.75 in cash ($7.8 billion) by Blackstone Capital Partners (NYSE: BX). ADS is recently trading at $76.91. ADS call option volume of 5,935 contracts compares to put volume of 28,841 contracts. BX is expected to shut on the purchase of ADS before the end of the year. ADS December option implied volatility of 26 is above its 19-week average of 16 according to Track Data, suggesting more massive risk.
Merger Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
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Filed under: Rumors, Financials and analyticals
Today’s headlines that IBM (NYSE: IBM) Is looking at beefing up its security offerings raises the question if management would acquire Israel-based Check Point Software (NASDAQ: CHKP). Val Rahmani, IBM’s general manager of infrastructure management for global technology services, sees security as a key to growth. Val said, “We’re looking at a lot of different companies right now, as we always do in a number of different spaces within security.”
Until now, the thought on the Street was that Check Point was going to continue as a stand-alone company, but with IBM on the prowl, it may be too much for CEO Gil Schwed to resist. Check Point currently trades at a market cap of $5.53 billion, and an acquisition would certainly come with a much higher price tag. Based on valuation, it would take between $7-8 billion to buy the company. For deep-pocketed IBM, that’s not too high a price. For Schwed, a takeover at that price would tough to reject, and it would break all records for M&A of an Israeli company.
Based on IBM’s track record, I would doubt that it is going to try to grow its own security business organically; rather, it will most probably buy a serious player. Stay tuned to see if that player will be Check Point.
Disclosure: Writer holds a position in CHKP. He has no other position in any stock mentioned as of 11/2/07.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com.
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Filed under: Financials and analyticals, Value and lack thereof
While it has been shaky so far, Wall Street is finding ways to deal with the large buyout loan overhang. Then again, in some cases - such as with the failure of the Harman International Industries Inc. (NYSE: HAR) buyout - things have been fairly brutal.
Ironically enough, this situation can be an opportunity. In fact, according to a report in Bloomberg.com, Lehman Brothers Holdings Inc. (NYSE: LEH) has put together a $3 billion fund to invest in leveraged loans.
It does seem like a good idea. After all, there has been quite a bit of distressed selling. And, there are many quality issues on the market. Of course, Lehman is not alone. Other such funds include offerings from BlackRock and Eaton Vance. No doubt, I suspect this is only the beginning.
So, yet again, Wall Street has found a way to deal with a massive mess — and in the process, will probably make a nice profit.
Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar On the web Guide to Decoding Financial Statements
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Filed under: Deals, KKR, Financials and analyticals, Texas Pacific Group, TXU Inc., 2007
Yesterday’s $11.5 billion debt offering for Energy Future Holdings, formerly known as TXU Inc, proceeded nicely considering the market turmoil of the last few weeks, according to TheDeal.com.
It’s still just a small portion of the $36 billion commitment, but the discounts were smaller than expected. This must come as a relief to KKR and Texas Pacific Group, which launched the $44 billion buyout in February.
Does this mean the debt markets are recovering? Perhaps. Meanwhile, there’s still a lot of debt to sell.
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Filed under: Deals, Financials and analyticals, Value and lack thereof, Public or private?
Legendary fund manager Mario Gabelli thinks that price for the Cablevision Systems Corp. (NYSE: CVC) buyout is way too low, and he has some independent backing. According to The Wall Street Journal, ISS Governance Services, one of the leading proxy advisory firms to institutional investors, stated in a report Friday that “the theoretical target price for Cablevision, by a number of analysts, is much higher than the current offer price.”
Gabelli’s funds own over 8% of Cablevision. While the company’s shares trade below $35, Gabelli states they’re worth $50.
The fight between the powerful fund manager and the Dolan family, which founded Cablevision and plans to take it private, is going to get messy and will probably end up in court. Gabelli probably has one of two goals in pushing the Dolans on the deal’s price. The first would be to get them to increase their buyout offer. The other would be to bring a third celebration like Comcast Corp. (NASDAQ: CMCSA) to the table to make a higher bid of its own.
The Dolans have tried to take the company private twice before. Each time the deal has floundered on price.
The founding family might have a card up its sleeve. The value of cable companies has fallen sharply in recent months on increased competition from satellite Television and broadband and video offerings from the massive telecom companies. Shares in Comcast have fallen from $30 earlier this year to $24.
For the Dolans, an interesting defense of their bid goes like this: the value of cable companies is falling, so actually we’re overpaying to take our company private.
Douglas A. McIntyre is a partner at 24/7 Wall St.
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