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.

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