Friday, July 06, 2007

Hilton Break Fees

Hilton Hotels Corp. (NYSE:HLT) announced that it would pay Blackstone (NYSE:BX) $560 million if it receives a better offer and terminates a takeover agreement with the private equity company. Blackstone, who is buying Hilton for about $20 billion plus debt, would pay Hilton $660 million if it backs out of the deal.

Break-up fees are supposedly customary in takeovers and are written into the deal to ensure the two sides develop tunnel vision and remember to close the transaction. In this case Blackstone has offered to pay $20 Billion plus assume huge amounts of debt to acquire Hilton. Would there have been another bidder?

This deal will almost surely be reviewed by the Federal Trade Commission (FTC) who will most likely demand some form of change. In the political twilight of the last year of the current presidency things can slip and the unexpected can happen. The powers that be are not that powerful or are distracted planning their next move.

Private equity has become politicized. Populist politicians are calling for increased taxation. Hotel power is certainly becoming more concentrated.

There is an angry dog that wants to bite something in the private equity world.

What looks like a vanilla mega-deal may become a political football. The break fee may become an albatross. Blackstone may have to agree to terms or conditions that do not fit into their game plan. The break point of financial pain will be of course in the range of $660 million if Blackstone does not get enough of what it wants.

There is no law that says all deals must close as intended.

Thursday, July 05, 2007

KKR Leads March Of The Zombies

If you have not heard yet KKR is to go public (NYSE:KKR) I am waiting for someone to create an Exchange Traded Fund (ETF)so that we may trade the traders.

Despite a very well publicized narrative that the private equity funds are using the IPO vehicle to liquidate their positions there seems to be enough demand to get the IPO's off. My suggestion for the proposed ETF's stock symbol is "TRAP".

The stream of private equity offerings reminds me of a bad Zombie movie. You know the scene where they just march forward mindlessly and regular village folk cannot reason with the undead. I think the Zombies first kill the village priest so as to disconnect the people from truth and knowledge. Rather telling strategy!

Everyone is pointing the financial finger to the huge fees that the private equity funds have been making. Part of KKR's rationale is to try to avoid paying fees to investment bankers. But as any investor who follows publicly traded investment bankers fees are fickle and dry up in an instant.

Private equity has built up a huge inventory of deals where they are restructuring and supposedly creating value. The private equity industry cannot point to a steady stream of repaired businesses that shareholders will want. It's all about the fees and therefore just a money grab.

Tuesday, July 03, 2007

Office Depot's Questionable Analyst Call Program

Office Depot (NYSE:ODP) has run into some rather stupid problems. The allegations are that members of the Investor Relations Staff pro-actively made phone calls to sell side analysts approximately one week before the company filed an 8K warning of bad news.

The allegations continue with the proposition that as a result of these individual phone calls analysts concluded earnings will be worse than predicted. This resulted in precipitous selling activity as brokers sold ODP shares and or purchased puts. The SEC apparently is involved and the fiasco continues to unfold much like peeling an onion.

At this point no one is disputing that the calls were made. Hard facts conclude that most if not all analysts immediately concluded the absolute need to sell.Considering that the quarter end was only at most two weeks away, any analyst or informed observer would know that most of the numbers are in.

In an age and day of computerized inventory with bar code scanning and sophisticated cash registers, you have to believe that Office Depot knows where they stand probably on an hourly basis; certainly on a daily basis.

Some points to consider are: What is Office Depot’s understanding of Reg. FD and the Quiet Period? Were they playing with the 30 day time frame? When was the decision made to announce earnings? Was there a script that had been pre-approved? If so by whom? Was the script deviated from? Were senior officers and board members aware that this function was being conducted?

If there was no new news why were the calls made in the first place? Does Office Depot Investor Relations Staff and or senior officers consider one on one phone calls to analysts to be exempt from quiet period regulations or REG FD?

From the analyst point of view your phone rings and a staffer from Office Depot’s Investor Relations staff is calling to point out something. In the last analyst conference call there was much concern over margins. Analysts are paid to figure things out. What is the context of the news that was presented to the analysts. In any event what is their legal obligation? They must all be aware of the root causes for Reg. FD and Sarbannes Oxley. What was going through their heads?

It would appear that they all complied with their employment obligations and raised the alarm internally. But who got the news. Were all clients in receipt of the same information or was their favouritism? If you are a client with that analyst’s firm and did not get the news quickly ...well I guess we are headed to a class action here. Investors who lost money may be inclined to move their account to the other guy.

This is all bread and butter stuff. It does not appear that there is a new frontier here. The various in house counsel are probably ripping their hair out of their collective heads. I know two things for sure. Firstly I am glad I do not work in the Investor Relations department of Office Depot. Secondly I am glad I am not an analyst covering this stock.

On June 28 the company filed an 8K which spoke to the anticipated bad news. It anticipates releasing Q2 information on July 26. At best Office Depot looks unprofessional and inept. If they can shake off the legalities there will be a lingering doubt about their ability to communicate.

Office Depot on their investor relations section of the corporate web site kindly lists the analyst they believe are following them:

A. G. Edwards & Sons, Inc. Brian S. Postol
Bear, Stearns & Co. Chris Horvers
Buckingham Research Daniel T. Binder
Citigroup Investment Research Bill Sims
Credit Suisse First Boston Gary Balter
Deutsche Banc North America Michael Baker
FTN Midwest Research Daryl Boehringer
Goldman Sachs & Co. Matthew J. Fassler
JP Morgan Steve Chick
Lehman Brothers Brad Thomas
Merrill Lynch Danielle E. Fox
Morgan Stanley Armando Lopez
Piper Jaffray Mitch Kaiser
Prudential Equity Group, LLC Mark J. Rowen
Sanford C. Bernstein & Co. Colin McGranahan
William Blair Jack Murphy

Monday, July 02, 2007

Cerberus and KKR Lose Bid for BCE

Bell Canada Enterprises (NYSE:BCE)is recommending that the all cash deal by Ontario Teachers Pension Plan be accepted. Long suffering BCE shareholders who have seen BCE hemorage business to more nimble competitors are finally being rewarded with a supposedly high cash offer. Goldman Sachs (NYSE:GS)stands to earn large fees and bragging rights to what many believe is the biggest leveraged buyout that the planet has ever seen.

The transaction begs the question: "Did the guy who spent the most money really do the right thing?" Confirmed deal junkies such as Cerberus and KKR used various forms of non cash structures to help mitigate the leverage risk. Cerberus and KKR have many many deals in their financial stables. If they felt they needed to hedge their bets I would not have argued with them.

Investors typically have an "In cash we trust all else is B*#LS*#T" approach. Therefore smart financial engineering proved to be an incredibly large tell in this latest round of financial poker.

Investors were overjoyed with the board recommended offer and fed up with BCE's history. The sad reality is that the BCE Board could not find a way to create value for its investors. Ontario Teachers Pension Plan along with Providence Equity Partners and Madison Dearborn Partners will now have to fix BCE and then return to the market with a higher PE but more saleable narrative.

We will see who really wins. I am not sure that selling low today and buying high tomorrow is the correct formula for wealth creation.