Reuters Deal Zone

Turmoil in the credit markets has put deals on the backburner across the board – including a number of planned sales of broadcasters. 

Television broadcasting group Nexstar Broadcasting Group Inc. said earlier in August it was suspending talks with prospective buyers because of the difficult conditions in the financing markets. Another broadcaster, LIN TV Corp. had been exploring a sale but indicated on a recent earnings call that a sale may be delayed by the weakness in the debt markets, according to a research report by Bear Stearns analyst Victor Miller. A call to LIN was not immediately returned.

Despite the current turmoil, Bear Stearns thinks those two will be sold in 2008, and also thinks Cox Radio Inc.  should “more agressively repurchase shares or lever itself and go private”.

Clear Channel Communications Inc. is another stock that’s been beaten up a bit lately. Shareholders are due to vote on a $39.20 a share buyout in September while the stock is trading at $34.83. ”We believe … a renegotiation of the price seems unlikely given that that has occurred twice already,” wrote Bear Stearns, which has the company as a one of its three top broadcast stock picks.

Bear Stearns points out that while the Nasdaq has fallen 6 percent from recent peak levels, broadcast stocks have fallen 32 percent with leveraged and/or deal-tinged broadcast stocks particularly hurt.

Maybe the picture for TV won’t be in tune until the finance markets stop trembling? 

After taking more than a year to put the finishing touches on its fifth private equity fund, Blackstone Group President and COO Hamilton James said on Monday’s quarterly earnings conference call that the firm is in fund raising mode again. Again? But the fund, known as Blackstone Capital Partners V, just closed on Aug. 8 at $21.7 billion. How is this possible?

Well, for one, Blackstone closed the fund last summer, and reopened it when it wanted to raise more money. In the meantime they did some huge leveraged buyouts, leading James to reveal on Monday that the fund that they just finished raising, is almost fully invested.
     
“In terms of fundraising, we added 1.1 billion to our assets under management and finalized closing BCP V at $21.7 billion; it is the largest fund in history,” James said on the call. “And it’s already 70 percent invested. It’s our typical practice to start raising a new fund when we get to be about three-quarters invested. So that’s something we anticipate doing shortly.”
     
The long history of BCP V’s opening and closing shows how willing institutional investors have been to shell out money to private equity firms, and just how determined Blackstone CEO Stephen Schwarzman was to holding the title of the world’s largest LBO fund.

Blackstone sent a formal press release on July 11, 2006 titled “Blackstone Private Equity Fund Closes on $15.6 billion.” But the firm quickly re-opened the fund, when it became clear that Texas Pacific Group and Kohlberg Kravis Roberts & Co. were raising buyout funds likely to top Blackstone’s. Blackstone was expected to push its fund total up to $20 billion. 
     
Sure, Blackstone recognized LP demand was there, and opened the fund raising door again while the LBO market was red-hot. But it’s no secret that Blackstone’s founder and CEO is extremely competitive, and very much wanted bragging rights to the world’s largest buyout fund. That title was in jeopardy when Goldman Sachs announced it was raising a $20 billion to $21 billion LBO fund in March. Blackstone’s S-1 filing before its June IPO said its private equity fund was up to $19 billion, still shy of Goldman’s target. 
     
Now Blackstone has officially closed its fund and it’s nearly all invested. Blackstone deals that used some of that money include the $17.6 billion deal for Freescale Semiconductor, the $10.9 billion deal for Biomet and the $26 billion deal for Hilton Hotels.

So if KKR’s fund closes at $22 billion, will Blackstone re-open its fund raising?

(Photo: Hamilton James, Reuters file)

Tribune Co., owner of newspapers including the Los Angeles Times and baseball team the Chicago Cubs, agreed back in April to be taken private for $34 a share. So why’s the stock currently trading under $26? 

Investors have lately seemed as nervy about this deal as Cubs fans before a big game.  

Monday saw Tribune’s shares sink to the lowest point since the deal got announced — falling 2.7 percent to $25.77.  The company is being taken private is a two-part deal, the first of which was a tender offer completed in May at $34 a share for 52 percent of the shares. The second stage, to buy out the remaining stock, is still to come.

“In general the tug-of-war is between the notion that all of the aspects of the deal were in place and that there would be nothing happening to prevent the remainder (of the deal) happening at $34 on schedule, versus the risk that something happened to change the ultimate closing of the deal,” said Barrington Research analyst James Goss.  ”It’s very possible some one could buy (the stock) right now and be very well rewarded,” Goss said. On the flip side, there’s a risk that terms of the deal could get renegotiated, he said. 

Hurdles still to vault include a shareholder vote next week and Federal Communications Commission approval.

Some analysts also have wondered whether Tribune will generate enough cash flow to meet a leverage-test detailed in its deal agreement, although the company has the flexibility to do more asset disposals on top of its planned sale of the Cubs.

It was a week of “unprecedented disruptions” in the credit markets, of reassurances from President Bush that there is enough liquidity following by urgent Federal Reserve moves to shore it up. Here is the DealZone week in quotes:
    
“There is a lot of liquidity in our system and liquidity will provide the capacity for our system to adjust.” — President George W. Bush. (August 8)
    

    “I’m told there is enough liquidity in the system to enable markets to correct.” — President George W. Bush (August 9)
    
    “The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee’s target.” — the first Fed statement of its kind since the Sept. 11, 2001 terror attacks. It followed moves to pump $38 billion into the banking system. (August 10)
    
    “These markets are currently experiencing unprecedented disruptions, which could have an adverse impact on the company’s earnings and financial condition, particularly in the short-term.” — Countrywide Financial Corp. in a regulatory filing. (August 9)
    
    “Ben Bernanke must feel like the captain of the Titanic. He knows the ship has hit an iceberg but, through the dark and fog, can’t see how bad the damage is.” — Sherry Cooper, chief economist at BMO Capital Markets in Toronto, referring to the Fed chairman. (August 10)
    
     “In the months ahead, we should expect to see the liquidation of billions more in subprime-related assets by all manner of investors as further waves of downgrades and defaults roll over the market.” — Jeffrey Gundlach, chief investment officer at TCW Group in Los Angeles. (August 10)
    
    “There’s a good chance it will get worse. We think there is going to be a lot more trouble to come in the way of defaults.” — billionaire investor Wilbur Ross. (August 6)
    
    “The last thing I would want to be as part of the new Chrysler is a distraction.” — Chrysler’s new CEO Robert Nardelli. (August 6)
    
    “When a CEO has to say … he has no desire to leave, it means people are talking about him leaving.” — James Ellman, hedge fund portfolio manager at Seacliff Capital in San Francisco, commenting on Bear Stearns CEO Jimmy Cayne. (August 6)
    
    “I do strongly believe that Alan Schwartz should be made CEO of the company, immediately.” — Richard Bove, bank analyst at Punk Ziegel & Co, on Bear Stearns (August 5).
    
    “When you build a stock up this much before the IPO, you have to wonder what’s for the encore? How will this company do in the aftermarket?” — Francis Gaskins, president of IPODesktop.com (August 10).

    “This is a classic example of the closer you are to Ned Johnson, the shorter the career.” — David O’Leary, chairman of Alpha Equity Research, on the departure of Fidelity Investments executive Ellyn McColgan and the role of the firm’s CEO Ned Johnson. (August 7)
    
    “It would be a terrible idea for Nasdaq to enter into a bidding war,” said Morningstar analyst Patrick O’Shaughnessy in reference to a struggle for control of Nordic bourse operator OMX AB with Borse Dubai. (August 9)

    “As fiduciaries, the defendants had a duty to put Refco’s interests ahead of their own. “Faced with their need for a substantial payday, (they) chose to pursue their own interests and line their own pockets.” — a lawsuit from two trusts representing creditors against private equity firm Thomas H. Lee Partners LP over its alleged role in the collapse of Refco Inc. (August 8)

Home Depot Inc.’s auction of HD Supply seemed troubled from the start. Now the deal may be renegotiated as the private equity buyers balk at the $10.3 billion price tag amid the floundering housing market and tight credit conditions.  

“This clearly is not a near term positive to (Home Depot) nor to a market nervous over credit,” said Credit Suisse analyst Gary Balter.  “The deal was not contingent on financing, though the material adverse change (MAC) clause may be broad enough to push for renegotiation.”

Balter said it was likely that HD Supply, which sells building materials, waste water and utility products to municipalities and contractors, would be sold for “materially less” than the current agreement.

“We would not be surprised if (Home Depot) ends up with a piece of the equity similar to Daimler’s retained interest in Chrysler—maybe up to 20 percent as that would create a better equity floor for the debt financing. Over time, this would not be the worst thing for HD as we believe there is value in HD Supply.”

Shares of Home Depot shed $1.71, or 4.5 percent, in midday trading after it said it may reprice the HD Supply deal and cut the price of a planned share buyback. 

“This is clearly a negative near-term for (Home Depot) … and may have broader implications for other pending capital markets transactions.”

Dow Jones: It’s a brand, not a branding exercise.

News Corp. chief Rupert Murdoch got plenty of Wall Street Journal staff fuming with nightmares that he would take the venerable newspaper’s identity after buying parent company Dow Jones and plastering it wherever he could — including on his more spicy news Web sites like the New York Post and The Sun.

Fear not, Murdoch said on a conference call with financial analysts and reporters on Wednesday to discuss News Corp.’s quarterly results.

“It’s too valuable,” he said. “We want to use it in every way ourselves that is going to make money. But you’re not going to see Dow Jones shirts.”

Too late. There already ARE Wall Street Journal T-shirts… and coffee mugs, baby bibs, knit caps, golf shirts, business card holders, blankets, cardigans, flashlights, glass alarm clocks, turtlenecks (men’s and women’s), travel mugs, notebooks, ponchos, bathrobes, toddler T-shirts, umbrellas, wine kits, and sweatshirts.

Sorry Rupert, looks like the Bancrofts were way ahead of you.

     El Paso Corp. , the natural gas and pipeline company, is going to great lengths to keep Chief Executive Officer Doug Foshee (left) from talking during the company’s “quiet period” for its offering of a master limited partnership (MLP).
    On its second-quarter earnings call on Tuesday, Foshee told investors he had to limit answers about the MLP because “our general counsel is standing over my shoulder with a piece of duct tape to put over my mouth.”
    Later, during the question and answer part of the call, Foshee again invoked the “duct tape rule” and declined to answer a question about the MLP.
    The Houston-based company said on Monday it is planning to offer $500 million common units to investors in an IPO during the fourth quarter.
    MLPs are a popular way for energy to extract value from assets. The partnerships pay no corporate taxes and distribute nearly all their profits to shareholders.
     (By Anna Driver in Houston)
  

How many banks does it take to fund a $20 billion deal?

In the case of Blackstone Group’s planned buyout of Hilton Hotels Corp., it apparently takes two more than expected.

In a filing with the U.S. Securities and Exchange Commission, Hilton said on Wednesday that Lehman Brothers Holdings Inc. and Merrill Lynch and Co. Inc. had joined the group of banks funding the deal.

Bear Stearns Cos., Bank of America Corp. and Goldman Sachs Group Inc., which led the financing for Blackstone’s $23 billion acquisition of Equity Office Properties Trust, were already part of the funding group. The other banks included Deutsche Bank and Morgan Stanley.  

Bringing in more banks and spreading the financing risk could help increase the odds that the deal closes, said one investment banker. In recent weeks, the tightening of the credit markets has prompted several companies, such as Chrysler Corp. and Alliance Boots, to delay or reprice their debt offerings.

Shares of Hilton hovered at $45.15, up 69 cents, in midday trading on Wednesday. That’s still below the Blackstone offer of $47.50, which indicates that investors still have some concerns that the deal may close, traders said.  

As the summer rolls on, deals continue to be pulled or delayed.

Tuesday’s announcements included British cable operator Virgin Media,which postponed the sale of its company after it became apparent buyers would not have access to the debt needed to do a deal right away.

In the mortgage sector, where the problems in the subprime market knocked the debt markets in the first place, U.S. mortgage insurer MGIC Investment Corp said its management viewed it not obligated to complete its pending merger with Radian Group Inc.  The pair are the two biggest investors in C-BASS, which issues and invests in home loans to less credit-worthy borrowers and is facing a liquidity crisis.

Elsewhere, there are questions about U.S. student lender Sallie Mae. Despite the lender saying Monday its $25 billion deal to be bought by a group of private equity groups and banks should be consummated in October, a source close to the buyout group maintained that closing conditions may not be met.

In addition, apartment landlord Archstone-Smith said on Monday that it expected the closing date of its purchase to be pushed back to the fourth quarter.

Along with Virgin Media, other British deals on ice are Britain’s Cadbury’s sale of its North American soft drinks business and Mitchells & Butler’s plans to spin off its property unit.

Virgin Media, whose biggest shareholder is entrepreneur Richard Branson (above), had asked suitors to submit expressions of interest by the first week of August to kick off an auction of the company, people familiar with the situation told Reuters. But it said Tuesday that its financial advisers — Goldman Sachs and UBS — recommended the strategic review process be extended until potential strategic partners or bidders “can complete their proposals in a more stable debt market environment”.

Mondays just aren’t the same lately.

Instead of starting the week with a flood of merger announcements, Monday began with a trickle. Globally, only $7.4 billion in deals were announced on Monday, with only $1.4 billion in deals unveiled in the U.S., according to research firm Dealogic.

That marked the slowest Monday since the Memorial Day holiday on May 28, when only $8.4 billion in deals were announced, Dealogic said.  The busiest Monday in the past four months — with $134.7 billion in deals — was April 23, when Barclays Plc unveiled its first takeover bid of $88 billion for ABN Amro, Dealogic said.

Instead of spending weekends negotiating deals, lately bankers said they have been focusing on closing the deals already on the table. The tightening of the credit markets, fears of hedge fund losses and the meltdown of some mortgage lenders have made it more difficult to complete some leveraged buyouts.

Debt for several meaty deals still must be sold, including the $26.4 billion purchase of First Data Corp. and the $31.8 billion buyout of TXU Corp.  Today, the completion of the Sallie Mae deal was called into question when a source close to the buyout group told Reuters that the closing conditions may not be met.

While August is seasonally slow as many dealmakers escape to the Hamptons, the credit markets — not the beaches — are more to blame for the current slowdown, bankers said.

Still, despite the recent doom and gloom, merger volume continues to outpace last year’s record level. Global merger volume has hit $3.5 trillion so far this year, compared with $2.2 trillion a year ago, Dealogic said.