Pushback over buyouts suggests end to easy PE
More tussles expected over prices, terms, regs
March 19, 2007, FinancialWeek - After attracting record amounts of cash and investing it through bigger and bigger buyouts, private equity funds are getting serious pushback from disgruntled shareholders, mutual funds, corporate boards and regulators.
Many deals are running into trouble over pricing, with critics charging that takeover targets are undervalued. Others are facing regulatory resistance.
This growing pushback, which is unlikely to go away anytime soon, combined with the fact that choice buyout targets are increasingly hard to find, has industry players beginning to talk about a market top. If the resistance persists, private equity groups may have to pay more for deals, ultimately reducing returns to investors.
Last week, the proposed $19 billion buyout of Clear Channel Communications by Bain Capital Partners and Thomas H. Lee Partners took a major blow when shareholder advisory firm Glass Lewis recommended investors vote against the deal, saying it undervalues the media company. In its report, Glass Lewis valued Clear Channel between $39.71 and $41.40 per share, compared with the $37.60 a share the buyout funds are offering. The resistance forced Clear Channel to push back the shareholders' vote on the deal almost a month to April 19.
Earlier this month, mutual fund manager T. Rowe Price said it is opposing the $3.1 billion buyout of Laureate Education by a group including Kohlberg Kravis Roberts, Citigroup Private Equity and hedge fund SAC Capital Management. The fund manager, which owns roughly 8% of the higher education company, said in a letter to Laureate's board of directors filed with the Securities and Exchange Commission that the "offer price is significantly below the true long-term value of the company."
And the board of baseball card maker Topps is embroiled in a fight over its $385 million buyout by a group including former Disney chief executive Michael Eisner. Two directors who voted against the offer because it was too low got tossed from the board last week.
The deal grabbing the most headlines has been the proposed $32 billion private equity buyout of electric utility TXU Corp., and for reasons that have little to do with price. Last week the Texas state Senate approved legislation that would give the state authority to bar a utility from controlling too big a piece of any geographic market, which might force TXU to sell off some power plants. In addition, the legislation would give the state the power to approve the utility's sale to KKR and Texas Pacific Group.
New deals aren't likely to get any easier, industry observers said, as shareholders, well aware of the outsize returns and capital inflow that buyout firms are enjoying, want that reflected in the deal price. In other words, they want their share of the pie.
"Over time, as more capital streams into any market, it becomes more efficient, and improved efficiency means reduced returns," said Seth Lehr, a partner with LLR Partners, a $620 million private equity firm.
Reduced returns, in time, should slow the flow of capital to the sector. But for now the going is good, as buyout firms raised more than $200 billion last year.
To use that capital, it's almost necessary for firms to pull off big deals. But those are the deals that are much more difficult for a private equity firm to do in a friendly manner.
"When you're taking private a $200 million company, you've probably got a handful of investors that don't have the ability to rock the boat," said Steven Bernard, director of mergers and acquisitions market analysis at investment bank Robert W. Baird. "When you get into S&P 500 names, you're talking about a different shareholder base: pensions, endowments, hedge funds. There is a huge constituency to convince to take the deal."
Making things even more challenging is the fact that the abundance of capital at everyone's disposal may mean that much of the low-hanging fruit has already been plucked.
"If there is no more oil under the spot that you're on, you've just got to go looking elsewhere," said Dennis Barsky, a partner in the private equity practice at law firm Jones Day. "There is so much money floating around that [private equity firms] are looking at bigger deals, deals in jurisdictions that are more risky and industries that they traditionally haven't looked at."
For example, recent industry talk suggests private equity firms are sniffing around automaker Chrysler Group, the mass-market and money-losing unit of Germany's Daimler-Chrysler.
"The interest [in Chrysler] is a mystery to me," said Bill Wexler, managing director of business advisory firm BBK. He said a strategic buyer makes more sense because it could leverage vendor relationships. Additionally, any buyer would be faced with dealing with the powerful autoworkers unions, which would add yet another wrinkle to a buyout deal.
But buyout firms would rather push and even stretch for deals than have to return funds to investors.
Mr. Wexler explained that when his firm points out flaws in a possible acquisition target, the private equity managers make their most aggressive arguments against the assumptions and conclusions it presents.
"That obviously reflects the fact that they're under pressure to deploy their money," he said.
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