As we noted in Opening Bell this morning, another big buyout has gone the way of all mortal things. Today’s entry into the deal graveyard is the $8 billion Kohlberg Kravis Roberts and Goldman Sachs buyout of Harman International. According to most news stories on the deal, Goldman and KKR are forking over $400 million in exchange for convertible notes, Harman’s using the money for a stock buy-back, and everyone’s amicable, honky-dory, smiles and handshakes about the new deal.
But when we squint at the fine text, we’re not sure that Harman should be smiling so widely. According to the acquisition agreement, the company was due to collect a $225 million break-up fee if KKR and Goldman walked. So what’s seems to be happening is that they are selling $400 million of notes to the balking buyers for $175 million. Let’s call that a 57% discount. So Harman will now owe $400 million of principal to KKR and Goldman in exchange for just $175 million beyond what they were arguably already due according to the agreement.
But Goldman and KKR are getting more than just the notes. They are getting an option to buy the stock. Typically, a convertible note is linked to a share price that places the option currently out of the money. But if we follow through on the idea that Goldman and KKR are buying the notes at a discount, we can see that these are actually currently in the money. The $104 a share translates into 3.8 million shares for $400 million of notes. Those shares are now trading at $85, which means that the buyers have entitled themselves to $326 million of shares for just $175 million dollars.
To put it even differently, after the discount, the deal prices the shares at $59. We’re not sure that’s exactly the “vote of confidence” in Harmon that its executives are touting. Harman may now have an additional $175 million for a buyback but this seems a steep price to pay for that money.
Of course, if you figure that break-up fees are not sunk costs for dead deals because the buyers aren’t ever going to pay them anyway—a growing trend from private equity buyers, to be sure—then we guess it does sound like great deal for Harman. It’s probably just our short-sighted stinginess that makes us think in terms of additional, incremental dollars in the deal rather than the complete $400 million package.
KKR and GS Capital Partners to Invest in Harman International [Press release via Market Watch]

  • 25 Sep 2007 at 10:00 AM
  • Banks

Closely Watched First Data LBO Closes

First Data was supposed to be one of the big leveraged buyout deals teetering on the edge of extinction thanks to the credit crunch this summer. The debt load of the company was said to be at the outer limits, leaving it with razor thin margins for slip-ups. But last week investors snapped up its $5 billion buyout loan. In fact, the loan was over-subscribed by about $2 billion.
Last night First Data said the deal had closed. First Data has gone private, and its stock has been removed from the New York Stock Exchange.
Earlier this month, the buyout firm behind the deal, Kohlberg Kravis Roberts & Co, was said to be in a nasty negotiation with the seven banks involved in arranging the First Data transaction. The banks had become nervous about massive loans on their books, and were pressing KKR to renegotiate its deal. KKR eventually did offer one concession—a leverage ratio financial test in its bank loans that has been described as “toothless” and “mere optics.”
While there are still questions about the financing—banks continue to look for ways to syndicate the nearly $24 billion in debt financing they committed to the deal—but fears that the credit crunch might derail the biggest deals, or leave a the financing banks with large losses, seem to be abating.

KKR completes $26 billion First Data takeover

NEWSCORPDOWJONESRUPERTMURDOCHWALLSTREETJOURNALSMALL.JPGRupert Murdoch almost seems to be living up to the worst fears many had when made his bid for Dow Jones. Almost.
He’s been “flexing his muscles” by calling Wall Street Journal reporters, according to the Los Angeles Times. At least three reporters have had calls for him.
So what has prompted Murdoch’s calls? Does he want more favorable coverage of China? More “fair and balanced” Fox New Channel style reporting? A five-star review for the Simpson’s Movie?
Not quite. It seems that what Murdoch has been doing is attempting to keep the reporting staff of the Journal intact. The three reporters he’s called were considering leaving the Journal and Murdoch has asked them to stay.
“Murdoch, who has been vacationing in the Mediterranean in recent days, made the calls to the reporters from his yacht, the Rosehearty, named for the Murdoch family’s ancestral home in Scotland,” the LA Times reports.
Scandal upon scandal! He’s got a yacht! It’s in the Mediterranean. Where are the reporters’ yachts? Where is the Mediterranean for the reporters?
We’re not sure why this is anything but a positive story for the Journal, its editors, its reports and its readers. As we maintained from the beginning, Murdoch did not come to destroy the Journal but to own it. And now he’s personally reaching out to reporters in an attempt to keep it intact.
But there’s already a movement to make something scandalous of these moves. “Some journalists in the newsroom took the gesture as a sign of Murdoch’s commitment to keep the staff’s quality high. Others said it showed that Murdoch would take a hands-on approach in newsroom affairs despite a special committee established to keep him from interfering in coverage,” the LA Times reports.
Heaven forbid! The owner is trying to keep his top reporters! It’s a clear violation of the editorial integrity of the newspaper, which apparently now means letting the newsroom fall report.
So who are the put-upon reporters who got the call? The LA Times named them as Tara Parker-Pope, Kate Kelly and Henny Sender. The latter two are DealBreaker favorites, who have broken important stories in recent months. (Tara Parker-Pope is a Health writer.) We’re sure they’re in high demand, and it just seems demented to expect that Murdoch wouldn’t fight to keep them on board.
Our question: is this what they were talking about when they said Murdoch would “interfere” with the Journal? If so, bring it on!
Murdoch’s presence felt at Journal [Los Angeles Times]

  • 02 Aug 2007 at 10:35 AM
  • Companies

Disney Loses Its Mind

penguin-chick.jpg Disney has officially lost its mind. The Immodest Mouse bought Club Penguin, a social networking site for the tween and pre-tween demo. As the name suggests, Club Penguin allows you to make your own penguin avatar and enter a virtual world where you can endure the brutal, constantly near-death existence of a penguin to the High School Musical soundtrack. Nothing eases the pain of standing on the outer edge of a pack during a blizzard on the verge of starvation and metabolic shutdown than “We’re All in This Together.”
Capitalizing on the popularity of penguins, who have displaced the morbidly obese in Hollywood as the de facto generators of lazy comedy (we all know, from Eddie Murphy movies to Big Momma’s House to Tyler Perry that everything fat people do is hilarious, but we are just beginning to discover that everything penguins do is hilarious, like surfing, dancing, or getting eaten), Club Penguin was founded by three Canadian dads in 2005. The site is ad-free, which makes it all the more un-monetizablelicious.
Disney paid $350 million for Club Penguin. The site must be huge to generate a price that’s almost 70% of what MySpace went for, right? Here’s the kicker – the site has 700,000 users. That means that Disney paid $500 per user (on what we’re sure is a pretty sad revenue number). Disney, deciding this wasn’t ridiculous enough, has promised another $350 million by 2009 if the site meets its growth targets.
The Wall Street Journal reports that the Club Penguin founders “decided to sell now because the company had got to a point where it needed a partner to grow.” That and they realized they hit the jackpot by coming across a drunkenly irrational mouse.
When Zuckerberg heard this, he instantly upped the required facebook bid in his head to $35 billion.
Disney Buys Kids’ Social-Network Site [Wall Street Journal]

  • 30 Jul 2007 at 11:44 AM
  • Companies

Xerox Develops Green “High-Yield” Paper

paper(1)_lg.jpg Xerox has developed a new strain of low-cost environmentally friendly paper that compares in quality to standard 20-pound bond paper many businesses use. Xerox’s “High-Yield Business Paper” is higher-yielding than most subprime issues and made in a much less intensive way than most paper on the market.
The new paper avoids some of the problems with “green” paper of the past, like its proclivity for curling in printers and spontaneously combusting in the hands of children. The new paper does have a slight aging problem, however, pictured here after two weeks out of the package. Here’s a list of the pros and cons of the new paper:
-Requires half as many trees, half as much energy, fewer chemicals and one-third as much heart to produce
-Weighs 10% less, looks better in swimwear
-Costs less
-Still beats rock
-Can now be folded 12 times
-Has a low fertility rate
-Made from Giving Trees
-Not as white or smooth as what we conventionally call “paper,” or “gravel”
-Yellows badly as it ages, confusing Egyptologists, politically correct Asians
-Goats won’t eat it, not even for comedic effect
-Paper cuts now fatal
Xerox Develops a ‘Green’ Paper, But Will Firms Add It to Fold? [Wall Street Journal]

From a report that’s poised to win a cornucopia of awards for its breakthroughs in the field of human behavior, scientists—yes, scientists—have determined that “US executives have been able to secure more favorable research ratings for their companies from investment banks by bestowing professional favors on Wall Street analysts.” Time out. Did they just say what we think they just said? Let’s watch the tape again: “US executives have been able to secure more favorable research ratings for their companies from investment banks by bestowing professional favors on Wall Street analysts.” They did, indeed! Hang on. We need a second.
Okay, we’re going to try and muscle through this. “Unprecedented research” performed on 1,800 equity analysts found that an executive could greatly increase the odds of his company getting a happy face emoticon instead of the one with a foot where the mouth should be, by offering analysts favors ranging from recommending them for a job to agreeing to speak with their clients to blow job y backrub combos. Jesusmaryandjoseph! Keithrichardhahn! Johnfranciscarneythethird!
We’re not finished— analyst receiving two favors were 50% less likely than non-favor receiving colleagues to downgrade a company. We’re not finished—“favor-rending” to analysts in order to reduce the chances of a downgrade in the wake of poor results or a controversial deal is “widespread.” Meaning it happens a lot? In what kind of sick, fucked up, alternate universe was this study conducted?
Are you ready for this biggest kicker of them all? Kurt Schacht, director of the Center for Financial Market Integrity at the CFA Institute, which represents more than 80,000 analysts and fund managers, said that “Activities such as these are in clear breach of our code of conducts and standards…and are unethical.” Someone hand us a Molotov cocktail.
Executives find favours bring better ratings [FT]

  • 23 Jul 2007 at 10:54 AM
  • Bancroft

The Bancroft Ownership Mystery

NEWSCORPDOWJONESRUPERTMURDOCHWALLSTREETJOURNALSMALL.JPGOff to a slow start here this morning because of the rain in New York City. We had to wait for our interwebs to dry out. (Just like Alphaville, the deal blog at Financial Times, which has reportedly had trouble due to the flooding in England. Unless that’s just Brit-speak for, uhm, one too many pints on Sunday night.)
But it’s back to business now. And by “business” we mean, of course, the saga of Rupert Murdoch, the Bancroft family and the Wall Street Journal.
One of the things we’re sure has been absolutely frustrating to anyone who has been following the endless tape of this story has been the complete lack of information about which members of the Bancroft family and its representatives control exactly which shares and which percentage of the votes. It was only at the middle of last week that we learned that Michael Elefante, the partner at the Boston law firm Hemenway & Barnes who is a trustee for two of the largest trusts holding shares for the family, can deliver a little less than half of the family’s 64% voting stake. Let’s call that 30% of the total voting power of the company.
Today the New York Times reports that the leader of the opposition to Murdoch within the family, Christopher Bancroft, controls around 14.5 percent of the total Dow Jones shareholder vote as of January. And his cousin, Jane Cox MacElree, is running around with 14.8 percent. (Apparently no-one else has more than 4.3%.) But you have to read a bit between the lines of the Times—too often the stuff we really want to know apparently isn’t “fit to print”—to understand why they spend so much time talking about Chris and so little talking about Jane. It’s because Jane isn’t really involved with the Dow Jones stuff, and leaves the decision making to Chris. So you can count her shares as shares controlled by Chris. That gives him around a little more than 30% of the voting power of the company, or about what Elephante controls. To that you can add the “Never Murdoch” shares controlled by the Ottaway family to come up with a 36% opposed number.
In short, going into today’s big Boston Bancroft powwow, Murdoch is a bit behind. Probably at least 36% of the voting power of Dow Jones opposes him. He’s got 30% on his side. But Murdoch has a secret weapon: the 30% or so of the voting power vesting in shares that were once held by the general public and are now held by stock arbitrageurs, the Bancrofts, the Ottaways and a few people who aren’t paying any attention. Most of those shares will vote his way. To play it safe, let’s put that pro-Murdoch number at around 25%.
Which gives Murdoch right around 55% of the voting power of the company. Since he only needs 51%, that means he wins. But it’s close. And since we’ve been guestimating at a few of the crucial numbers, it’s possible that it’s even closer than this. If the numbers are shifted a couple points in the only direction—say, Elefante only has around 28% of the vote in his pocket and only 22% votes held by common shareholders go for Murdoch, he’s down to a losing 50%.
Which leaves us at the exciting possibility that we may be entering the rare situation where a very few amount of votes—perhaps those held by a small shareholder who doesn’t even remember he has the shares in his account (or his attic)—could swing the voting. In short, the Bancrofts may be meeting in Boston in 2008. But the voting may well be in Florida, 2000 territory.
A Family Meets Today to Hear the Complexities of a Bid for Dow Jones [New York Times]
Bancrofts To Consider Murdoch Bid, ‘Close Vote’ Predicted [New York Sun]
Know Your Bancrofts [New York Magazine]

We got so caught up in the excitement over the board of directors, Bancroft family, Rupert Murdoch, News Corp drama that we’d totally forgotten about the insider trading angle to this story. But fortunately we have the Securities and Exchange Commission to remind us that prior to the public learning of the deal, a Hong Kong couple with ties to Dow Board member David Li, chief executive and chairman of the Bank of East Asia, allegedly engaged in insider trading.
According to published reports, the SEC has issued a Wells Notice to Li, informing him that it plans on filing civil charges against him.
For those of you who have never gotten one—a Wells notice is a sort of like a bill from the utility company stamped Final Notice. Except that instead of shutting off your electricity, if you don’t respond to the notice you wind up getting sued by the SEC. It’s basically your last chance to convince them that they shouldn’t file a lawsuit against you. Or, as a friend of ours once put it, it’s a notice that it’s time to move your funds off-shore, get out of the country and hire some very good lawyers.
SEC to File Civil Charges Against Dow Jones Director [Wall Street Journal]