CVC’s Australian loss: An isolated carcass

HOMEOWNERS who don’t keep up with their mortgage payments are liable to see their property repossessed by the bank. The same fate can befall private-equity firms that used large amounts of debt to finance big takeovers in the boom years, and can no longer pay back the loans. Just ask CVC, a London-based private-equity firm, which this week lost control of Nine, an Australian television network it paid A$5.6 billion ($4.5 billion) to acquire in deals between 2006 and 2008.

The channel will end up in the hands of a clutch of private-equity firms and hedge funds specialising in distressed debt. In the past 12 months these “vulture” investors bought the bulk of A$3.3 billion of loans extended to Nine from its banks at a fraction of their face value. Led by Apollo Global Management and Oaktree Capital, two American funds, they muscled out CVC by threatening to place Nine into bankruptcy. CVC will lose all of its A$1.9 billion equity investment, in what is thought to be the biggest private-equity loss in Asia, and among the biggest ever.

Distressed investors are sometimes maligned, but this deal is an advertisement for their restorative powers. A struggling magazine division had depressed earnings, making Nine’s large debt pile even less sustainable. With the magazine business divested and the debt excised, the company is now profitable. Upon hearing of the agreement, the broadcaster’s chief executive proclaimed: “Nine’s back!” Its fortunes, if not CVC’s, look much improved.

The problem for the vultures is that other carcasses are proving harder to unpick. Europe is where their hopes are highest. A survey by PwC, a consultancy, found distressed-debt investors have raised €60 billion ($79 billion) to buy loans from European banks, mostly with a view to precipitating defaults at the underlying firms and then taking control. Private-equity giants such as Carlyle and TPG have redirected staff away from normal buy-outs towards these “loan-to-own” activities. Lawyers are poring over documents to find ways to seize control of indebted firms.

So far, however, distressed-debt investors have been disappointed. “There’s not been a deluge [in Europe], we had been hoping for a deluge,” was the recent verdict of Howard Marks, Oaktree’s chairman. That’s because low interest rates and cheap funding from the European Central Bank have reduced the pressure on banks to slim down their balance-sheets by selling assets. Only a few loan-to-own deals have happened this year—notably in the debt of Endemol, a distributor of lowbrow television shows, and Fitness First, a struggling chain of gyms.

In America a few firms have fallen into the vultures’ talons—examples include Charter Communications, a cable operator, and Aleris, an aluminium processor. But roaring capital markets have enabled even distressed companies to refinance their loans. Some have protected themselves from scavengers by buying back their own bank debt at distressed prices, making it harder for the likes of an Apollo or Oaktree to push them out. And the complexity of wresting control from one shareholder continues to make “loan-to-own” deals relatively rare: repeated headlines about potential bankruptcy can damage the company being tussled over, leaving all parties worse off. “It’s a full-contact sport,” says Ben Babcock at Morgan Stanley. No wonder it happened in Australia.

Source: http://www.economist.com/news/finance-and-economics/21564876-rare-victory-vulture-investors

China Buyouts Come Into Focus

Thank Muddy Waters for China's biggest ever buyout. The short-seller's attack on Nasdaq-listed Focus Media triggered a proposed $3.7 billion offer from the company's chairman and a bunch of private-equity firms, including Carlyle.

But the attack was last November. The offer was announced in August. It will be weeks before the potential buyers know if they've been successful. That's about a year since the company's American depositary shares fell by two-thirds after Muddy Waters said the advertising display company owned fewer panels than it claimed—allegations Focus Media refutes.



What's taken so long?

The logical conclusion of a wave of short-seller reports slamming U.S.-listed Chinese stocks was that a wave of going-private transactions would follow, as company insiders, backed by PE firms, bought the businesses at deflated prices with the aim of relisting later, probably in Hong Kong or Shanghai. That's happened, but at a gentle trickle—not a tidal rush.

The Focus Media example shows investors aren't quick to jump to the buyout route. For starters, insiders who have faith the shares will bounce back are reluctant to delist. (Focus Media's shares have regained much lost ground in recent months.)

Then there are minority investors. Delaware incorporated companies going private almost certainly face a lawsuit from investors alleging they're being bought out too cheaply. At Focus Media, a Cayman corp., some minority shareholders are kicking up a fuss, saying the $27 per share offer is too low—though it's 6% above the price before Muddy Waters' report.

Litigation can cause delays, more fees and uncertainty. A deeper concern though is accessing debt to support the buyout. The Focus Media proposal includes about $1.6 billion of financing from Citigroup, Credit Suisse and Singapore-based DBS. They've provided letters saying they're "highly confident" of funding the deal. But final approval means persuading credit committees that Muddy Waters was wrong and that they can get their cash back.

Finally, there's the exit strategy. An IPO would be tough until equity markets pick up, and an onward sale—through a listing or to another buyer—means polishing up a tarnished reputation too. Simply put, a big impediment to a surge in going-private deals may be that mud tends to stick.

Source: http://online.wsj.com/article/SB10000872396390443819404577632810235688038.html