Private Equity Buyout of TXU Is Enormous in Size and in Its Complexity (NYTimes, 2/27/07)

February 27, 2007
Private Equity Buyout of TXU Is Enormous in Size and in Its Complexity
By ANDREW ROSS SORKIN
Wall Street banks have provided billions of dollars to finance takeovers in the last year, essentially serving as mortgage lenders to deal-hungry private equity firms, which are among the banks’ best-paying customers.
Now the lenders have created a new type of loan that has them ponying up part of the down payment on these deals as well. That trend is vividly illustrated in the $45 billion buyout of the Texas energy giant TXU, which was announced yesterday. There are risks in the transaction, as there are in any large buyout, but for the Wall Street banks behind the deal, it could be even riskier.
In an unusual twist that may soon become common, the banks are going one step further than simply providing the debt financing involved in the deal, in this case a daunting $24 billion of debt.
The banks are also lending $1 billion to TXU’s buyers, Kohlberg Kravis Roberts & Company and the Texas Pacific Group — not as secured debt, but in the form of equity using the bank’s own cash.
Known as an “equity bridge,” the arrangement allows leveraged buyout firms to buy companies with even less cash upfront. The idea is that the leveraged buyout firms will find other investors to ante up cash after the deal is announced.
These bridges can lead to trouble, however. If the private equity firms cannot find new investors — and it is their job, not the banks’, to find them — or if the value of the asset falls sharply, the banks are left holding the bag.
“This is how things blow up; people take more risk,” said Andy Kessler, a former research analyst and hedge fund manager who has written books about Wall Street. “If you go back to the crash of 1987, all the banks had huge bridges that went bust.”
Some have compared the use of the equity bridges to a much more risky version of Michael R. Milken’s famous “highly confident” letters in the 1980s takeover boom, which gave assurances that his firm, Drexel Burnham Lambert, could sell junk bonds to finance deals for its clients.
Investment bankers say that the private equity firms, which have become some of the largest fee payers to Wall Street, put pressure on them to extend an equity bridge in exchange for syndicating the debt, a job that can prove very lucrative.
“The bridge may be a pay-to-play,” Mr. Kessler said.
The new tactic has appeared in a handful of deals recently, including the $39 billion takeover of Equity Office Properties this month. It lets a private equity firm pursue enormous transactions without bringing in partners, at least until it has negotiated a deal on its own terms.
Indeed, the advent of the equity bridge could spell the end of giant consortium transactions, or club deals, in which often rival private equity firms team up on a bid. In the $11.3 billion buyout of SunGard Data Systems in 2005, for example, seven private equity firms banded together, each with a seat at the negotiating table.
The use of the equity bridge may instead spur private equity firms to be more competitive in bidding, because they would not need to forge temporary alliances of convenience with rivals to mount large bids. And that would take some pressure off the firms, which have been under scrutiny by the Justice Department over whether the consortiums constitute a form of collusion.
In the case of TXU, Kohlberg Kravis and Texas Pacific are expected to invite their limited partners — the investors in their own funds, like big pension plans — to invest directly in this deal. By investing alongside the private equity firms, these investors can share in the rewards if the deal pays off without paying the same enormous fees to the firms that they typically do to invest in their funds. Private equity firms offer direct investment as an inducement to also invest in their funds that do carry fees.
The TXU buyout calls for about $8 billion of cash upfront, $24 billion of new debt and the assumption of about $13 billion in debt.
Kohlberg Kravis and Texas Pacific are each putting up about $2 billion in cash. Goldman Sachs, Lehman Brothers, Morgan Stanley and Citigroup plan to invest $3 billion from their private equity arms.
That brings the cash total to only $7 billion, $1 billion short of the $8 billion required. That’s where JPMorgan Chase, Morgan Stanley and Citigroup are planning to come in with a $1 billion equity bridge.
The risk to the banks is that the value of TXU could fall sharply below the $69.25 being offered. Yesterday, TXU shareholders welcomed the deal, driving up the shares 13 percent, to $67.93.
The deal still must undergo months of scrutiny from state and federal regulators. And while the deal has won support through pledges to cut electric rates and scale back a plan to build coal-fired power plants, the private equity firms must still overcome a perception that buyout buyers are temporary owners who are not beholden to shareholders or customers.
Talk about building bridges.

亞太經濟出現1997年金融風暴前的徵兆！ (鉅亨網, 2/27/07)

聯合國專家：亞太經濟出現1997年金融風暴前的徵兆！
鉅亨網許婷婷／綜合外電報導‧2月27日2007 / 02 / 27 星期二

聯合國亞太經社會主席金學洙表示，全球熱錢大量湧入東南亞，使得資產升值、地區貨幣投機活動增加，雖然亞洲國家的經濟在1997的金融風暴後已逐漸蓬勃發展，但現在仍可能正面臨如同當年97金融風暴前的新危機。

金學洙認為，目前亞洲國家面臨的風險與97金融危機前的情形類似，主要就是因全球流動資金充沛、資產價格膨脹以及地區貨幣所承受的龐大投機壓力，將可能再次破壞該地區的經濟穩定。
雖然全球化帶來很多好處，但也讓這些亞洲國家的經濟面臨國際環境轉變所帶來的嚴重風險，因此金學洙表示，當前最重要的目標便是記取97金融風暴的經驗，他更敦促亞洲區政府應該保持匯率彈性，而各國央行更應了解自己的匯率政策。
金學洙指出，東南亞與東亞國家目前面臨 3種嚴重風險，首要衝擊便是全球資金流動充沛的效應，主要因為近年來對沖基金與信貸提供的資本流入大幅增加，而這些金融工具的迅速增長，也增加了該地區在不利事件發生時產生互相傳染反應的可能性。
第二則是在東南亞和東亞再次出現一些資產價值膨脹的例子，因為國際資金流動湧向亞洲股票與其他金融產品，使得亞太股票市場在2006年增長 29%，其中，印尼在2006年的股票市場增長就高達 55%，而韓國首爾的房價更在2006年上升 24%。
第三個風險就是近月來，東南亞和東亞國家地區的貨幣受到巨大的投機壓力，因為現時貨幣被低估，但即使相關當局做出抑制貨幣上揚舉動，但在2006年的名義匯率兌美元卻仍大幅升值，而這波升勢，預期在2007年還會繼續下去。
雖然亞洲金融暗潮洶湧，但金學洙仍提出 4個方法做為參考，首先，各國必須保有穩固的宏觀經濟基礎，才能保持投資者的信心以及維持經濟增長。
再者則是，各個國家必須發展健全的財政部門，如此才能建立信心和從資本流入中得利，銀行因此要有獨立性和具有競爭力的環境，還須更新知識和風險管理系統，以確保能夠對任何緊急狀況發出警告。
另外，各個國家還必須擁有雄厚的經濟基礎，以確保經濟體系的效率，其中要有清晰的產權，好讓公司和機構可以有效和透明地運作，而勞工市場也應有足夠的彈性，以適應經濟滑坡。
最後，各個則要改善地區性的合作，才能減輕金融市場動盪所帶來的衝擊，並且必須把這些領域的合作，擴大至該地區的其他國家和地區。
由於97年的金融風暴，除了迫使除了港幣之外的所有東南亞主要貨幣在短期內劇貶，也讓東南亞各國貨幣體系以及股市出現崩盤效應，當時更引起大批外資撤逃和國內通貨膨脹的龐大壓力，因此該如何避免重蹈覆轍將是一個重要的思考議題。

The Biggest Buyout Ever Could Have Been Bigger(NYTimes, 2/11/07)

February 11, 2007
Dealbook
The Biggest Buyout Ever Could Have Been Bigger
By ANDREW ROSS SORKIN
IS Samuel Zell the hero in the epic battle for Equity Office Properties?
Mr. Zell, the raspy-voiced deal maker who built Equity Office into the nation’s biggest office landlord, appears to have played the Blackstone Group and Vornado Realty Trust like two fiddles. Applying pressure at just the right moment, he coaxed higher and higher bids from each side, ascending to a multibillion-dollar crescendo.
Shareholders of Equity Office have praised Mr. Zell for his ability to extract an additional $3 billion over Blackstone’s original takeover proposal in November. “You have to hand it to him,” said James Corl, who oversees real estate investments for Cohen & Steers Capital Management, Equity Office’s largest shareholder. “He ran a fantastic process. That’s how you sell a company.”
So, bravo, Mr. Zell?
Wait. Hold your applause.
Has anyone stopped to think that just three months ago, Mr. Zell had been prepared to sell his company for $3 billion less — to the exact same buyer? Was he such a masterly negotiator then?
Blackstone, the same firm that agreed to pay $55.50 a share this week, almost walked off with Equity Office for considerably less. When Blackstone agreed to buy the company for $48.50 a share in November, Barry S. Sternlicht, the chairman of Starwood Capital who later teamed up with Vornado on its bid, called the deal “the greatest heist of all time.”
For Mr. Zell, it was a stroke of luck that his good friend, Steven Roth of Vornado, showed up to crash the deal and start a bidding war.
It may seem churlish to find fault in a bidding war as rapid-fire and intense as this one was. Still, Mr. Zell may have made a couple of flubs that prevented him from obtaining an even higher payout.
One of the more fascinating tactics in this fight was the use of the break-up fee as both a carrot and a stick. When Blackstone reached its original agreement, Equity Office offered a relatively tiny break-up fee of $200 million, far below the usual fee, which can run as high as 3 percent of the entire value of the deal. It was a shrewd move that allowed another bidder to emerge without having to clear too high a hurdle.
But once the battle commenced, that carrot turned into stick — to the ultimate advantage of Blackstone. After Vornado bid $52 a share, Blackstone countered with $54 a share but at the same time pressed Equity Office to agree to raise the break-up fee to $500 million.
That was when Mr. Zell started to hit some wrong notes. By agreeing to the higher fee, he began to make it increasingly difficult for Vornado to fire back with a credible offer.
Still, Vornado came back with a bid of $56 a share, disappointing analysts and investors who had expected a counter of more than $57 a share.
Then Mr. Zell broke a string. When Blackstone countered with an offer worth $55.25 a share, Equity Office asked for 25 cents a share more — offering in return to raise the break-up fee further, to $720 million. The break-up fee meant that Vornado had to pay the equivalent of almost $2 a share more than the underlying value of its bid to shareholders.
“That chess move chilled the bidding from our side,” said a person involved in Vornado’s bidding group who spoke on the condition that he not be identified because he was not authorized to speak for Vornado. “We wanted to go higher, but the break-up fee killed us.”
Perhaps, but that might just be jealousy talking. There’s no guarantee that Vornado would have come back with a new bid even if the break-up fee had been lower.
And Blackstone’s bid still had advantages — it was all cash and could be completed immediately — that Vornado might never have been able to overcome.
O.K., but would Blackstone have continued to raise its offer without the incentive of a higher break-up fee? Blackstone executives deny it, but it seems likely that the firm would have kept on going.
For one, Blackstone already had the right to match whatever price another suitor offered, effectively giving it the last word and making the break-up fee less meaningful to it.
And there were other factors — none of which had much to do with Mr. Zell’s negotiating skills — that created powerful incentives for Blackstone to keep bidding. Beyond the egotistic thrill of holding the trophy for “largest buyout ever,” Blackstone’s partners get paid a fee of one-half of 1 percent of the value of any acquisition they make. That means that Blackstone will receive about $200 million just for winning the auction. The higher the price, the higher the fee. A perverse incentive indeed.
The other thing that might have motivated Blackstone was that it is in the process of raising a new real estate fund, worth $8 billion to $10 billion, giving it good reason to deplete the current fund.
BLACKSTONE, of course, played its hand brilliantly, too.
By pushing so hard for those break-up fees, the firm was able to shut Vornado’s effort down. Blackstone also locked up nearly all of Vornado’s potential real estate partners, like Brookfield and Macklowe, by entering into negotiations to offload some office properties even before it had won. Those talks surely made it harder for Vornado to pull together a clinching bid.
Still, even Mr. Corl, the investor, conceded that Blackstone “had the wherewithal and willingness to go higher” with its bid.
Mr. Zell, an aspiring poet and lyricist, should have known that. In his holiday e-mail card sent to friends, he included a link to a song he wrote about the state of the financial markets, parodying the Burt Bacharach song, “Raindrops Keep Falling on My Head.”
The parody’s lyrics, in part: “Capital is raining on my head/Everything is liquid; we’re awash with cash to spend.”
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