Private Equity buy-outs: one goes out, one comes in

Very interesting!

KKR and Goldman Sachs on Friday attempted to pull the plug on the $8bn buy-out of Harman International, the high-end US electronics company, as the battle over the completion of deals signed before the credit squeeze turned increasingly ugly.

The move by KKR and Goldman’s private equity arm could prove to be a watershed moment for buy-out firms that went on an extraordinary dealmaking binge earlier this year but are now facing higher financing costs and a shaky economic outlook.

It signals that in certain cases, private equity groups are willing to sacrifice the reputational risk associated with abandoning deals, and the danger of not being viewed as credible buyers in future takeovers, in order to clear unwanted deals from their table in this cycle.

Nor is this the only example. From the same article:

This week, a consortium led by JC Flowers, the US private equity firm, considered invoking a MAC that would allow it to pull out of its $26bn deal to buy SLM, the parent of Sallie Mae, the large student lender.

The JC Flowers group believes that conditions at SLM have deteriorated enough both in terms of the company’s performance, due to the credit squeeze, and in terms of new legislation cutting student loan subsidies that is expected to be signed by George W. Bush, US president, people familiar with the matter said.

…

Meanwhile, Genesco, a US footwear retailer, filed a suit in a Tennessee court against Finish Line, a rival, to force it to complete their $1.5bn merger, which was announced in June. Finish Line declined to comment.

Which rather makes the Equity market messy, just at the moment. I look forward to the logical end-point: a single Private Equity firm simultaneously pursuing one deal while trying to break out of an old one.

Meanwhile, also reading the Financial Times (on my phone – news options are limited, therein), I found a bloody good example of irony:

The price of fine wine has fallen for the first time in a year as ripples from the credit squeeze reach the luxury goods market.

An index that shows prices for the world’s great vintages, the Liv-ex 100, dropped in August.

Prices in the sector had been up 43 per cent since January because more investors moved into alternative asset classes. But that bull run may be coming to an end, according to experts.

The irony?

The wine market has become dominated by professional money. Several wine funds have been set up in recent years as investors have sought “alternative” assets, which are not correlated to equities. Simon Staples, sales director at Berry Bros & Rudd, said people tended to “fly” to wine when other asset classes were suffering.

But Mr Gibbs argued that a clear link had emerged between stock market indices and the trade in wine. “The professional money in the market means that the wine market reacts much more quickly.”

Which basically just means it sucks to be into wine and not be a Rich Young Something to splash that sort of money about.

Cerberus Capital Management first back in the leveraged buy-out game

I think (and as I write quickly: WordPress now tells you when scheduled maintenance is due to begin – a wonderful introduction!).

Stora Enso Oyj, the world’s largest paper maker, will sell its North American unit to Cerberus Capital Management LP for $2.07 billion after the U.S. price of newsprint and magazine paper fell 6 percent in a year. The Finnish company’s stock rose the most since 2003.

…

Stora shares rose as much as 7.6 percent. The company said proceeds will be used to pay down debt. Cerberus will assume $450 million in debt in addition to the $2.07 billion payment for eight paper mills.

Now, oddly:

Falling demand for U.S. newsprint and magazine paper and the decline of the dollar against the euro made the mills in Wisconsin, Minnesota and Canada a drag on the Helsinki, Finland- based company. Stora, which cut 1,600 jobs and closed mills in Europe in the past two years, wrote down the value of its assets earlier this month amid rising wood costs and a worsening outlook.

Just what is Cerberus planning to do with it? Besides some hefty trimming (at least USD450m + interest worth). As Bloomberg points out, they had to deal with low value of the paper they have, recently:

Cerberus shelved a planned initial public offering for NewPage last year, citing market conditions. The owner of U.S. carmaker Chrysler LLC bought the papermaker two years ago for $2.3 billion.

…

Through the transaction, Stora will obtain 19.9 percent of NewPage, which will be headquartered in Miamisburg, Ohio. The holding “is considered as a financial investment and accounted for as an asset held for sale,” according to the statement.

That’s NewPage Holding Corp., the largest maker of coated paper in the US, also owned (held?) by Cerberus.

Apropos the decline in newspaper sales: (a) they’re shit – maybe if newspapers went back to being any good (someone please, please start a real national newspaper), they’ll (thank you, Hilary) sell more; and (b) Ted Rall worked that one out, too (go visit his site and read his wonderful comics):

Basic economics. I’m sure what becomes of the NewPage and Stora paper mills will be anything but.

The Medicare safety-net. Or, why can’t Government understand the concept of consequences?

Answer: Because they are not government, they are politicians, and that makes all the difference.

Follow this one, if your breakfast and coffee have settled.

Kevin Rudd will today reverse Labor’s long-held opposition to the Medicare safety net to protect the 1.5 million people a year for whom it saves money.

Labor earlier attacked the safety net as a sham. It was introduced before the last election to protect struggling families against high medical bills, but it has disproportionately favoured the well-off.

The nation’s richest 10 electorates, eight of which are Liberal, ended up with a quarter of the $250 million safety net proceeds last year, because the wealthy are more likely to see pricey specialists who tend to cluster in affluent suburbs.

Labor sources acknowledged the scheme was inequitable, but said that reflected a lack of access to Medicare-funded care in outer urban, rural and remote areas.

Labor will promote its $220 million “super clinics” as a solution to this imbalance. The clinics, including GPs, specialists and other health professionals such as physiotherapists, will be targeted at areas of need.

The safety net provides an 80 per cent discount on out-of-pocket medical expenses above about $500 for pensioners and families on medium incomes. For single people and families on high incomes, the threshold cuts in at $1000.

This runs counter to my usual Eco 1 example of price ceilings: rent control here in New York (here = 5 hours or so, from now, since I’m still in the office). The Romance of Rent Control is that is allows poor people (or suitably necessary public employees) to live in an idiotic city with idiotic prices. But.

Rent control does not apply to the people, it applies to the apartments. Meaning it is a failure, because: (a) apartments discriminate – there’s no rule dictating that a rent-controlled apartment be let to the poorest applicant (and common sense dictates exactly the opposit), and there never should be; (b) poor people aren’t connected, or networked – the odds of them finding their way into rent-controlled apartments, which people never leave, is far lower.

The Romance of Rent Control is also its failure. Welfarist housing policy should apply to people, not buildings, to work.

Thence the medicare safety net. It is being applied to people, on a deductible/ad valorem basis, with some (read: inadequate, entirely) means-testing, when it is in fact the geography that needs attention. Costs cluster around high-cost areas (a standard aggregation problem), but this policy ignores that.

The open question is, will AUD220m super-clinics fix the problem? How? By building medical facilities that rival the high-cost areas, in terms of out-of-pocket expenses?

The only way the government can leave this policy in place, but be able to claim that government expenditure is evenly-distributed, is by seeing to it that everybody faces equally high out-of-pocket expenditures.

Don’t get me wrong: I still say vote Labor. I’d like somebody to sit someone down and explain how silly this approach is, though. Our health care system does not need to invite more costly infrastructure to justify existing expenditure. We’re like gamblers chasing losses. By all means, build health care infrastructure to deliver health care as health care is needed – but respond to the need to govern, not the need to establish political gain.

Desalination costs expand again – now water prices will double

Sydney Water’s debt is set to double – to $7.5 billion – as its bottom line is hit by borrowing for the proposed desalination plant at Kurnell and plunging revenue caused by water restrictions.

But Sydney Water’s chief, Kerry Schott, defended the debt, saying it “hasn’t got to a level that would make you stay awake at night”. However, she warned she would become very concerned if the independent pricing tribunal did not approve the big rises in household and business water bills she asked for this week.

“We are heading into a lot of debt and we do need some price rises to help us pay the interest on it,” she told the Herald.

Funny – seems only recently they were going to go up by a third. Amazing what borrowing money you don’t want for projects you don’t need can do to your need to raise taxes (and let’s be clear on what this is).

Again – I think water is much too cheap in Australia. However, the prices should increase in a manner that encourages sustainable use – not because our state government of PFI-Third-Way tits decided to load up on debt for an unnecessary infrastructure roll-out.

And this – again – is for a billion-dollar monster than will only, at best, cover some 15% of supply. We’re hardly even investing in our capacity, even removing the extent to which our money (read: taxes, which, again, is what this is) is being used to pay lenders their interest.

I hope the government got our goddamn money’s worth in campaing contributions.