Private Equity: A Tale of Money, Madness, Mayhem

By Bob Jenkins

With half a trillion dollars in capital, private equity firms continue along their path to buy the world (the top 20 firms control companies with more than four million employees), despite increasing concerns in the money markets. VideoAge took a look at what’s happened so far, and wonders if Wall Street has any lessons to learn from Soggy Bottom USA.

Over the past several months, private equity firms have demonstrated a great deal of interest in the media. The deals are often highly leveraged and, by implication, dependent on cheap loans. If an avalanche of U.S. mortgage defaults drives interest rates too high, the arithmetic underpinning these deals will start to unravel, and foreclosures could well extend beyond low-end American property.

These are genuine and serious concerns. In July, ratings agency Moody’s woke up from its stupor and started warning that a deterioration in the debt market — that is funding much of this activity — was starting to make some of these deals look as dubious as the mortgage lending that prompted the problem. Moody’s also cast doubt on the oft-made claim that — freed from the short-term pressures of the stock market — private equity is good for businesses and the economy in general, as it allows for longer-term planning. Not everyone agrees with this idea, but Moody’s claimed it could find no evidence of such farsightedness in the sector.

Not that these doubts have shown any signs of impacting the private equity bull market. Thompson Financial reports that Asian private equity deals in 2006 hit U.S.$ 32.31 billion, triple the figure from 2005. The agency put the 2006 H1 figure for Australia at A$12.31 billion, (U.S.$10.71 billion), nearly reaching the 2006 full-year total of A$14.62 billion (US$ 12.72 billion). H1 2007 private equity deals in India have, at $2.33 billion, already exceeded the full 2006 figure of $2.27 billion, which was itself a record.

In the U.K., Carlyle Group made an unsolicited offer of $23 billion for Virgin Media, representing a 30 percent premium on the value placed on the company that was formed less than a year ago by the Virgin / NTL merger  — a deal valued at £940 million (U.S.$1.88 billion).  The offer prompted Liberty’s John Malone to hypothesize that Virgin Media might be prepared to take a pop. But many consider this to be no more than mischief-making by the usually media-shy tycoon.

But this activity has not been confined to British shores; it has emphatically been a worldwide phenomenon. Just this past August, Alliance Atlantis’ international distribution business was officially sold to Goldman Sachs. In March, the Kohlberg Kravis Roberts (KKR) and Permira-controlled Lavena took over of a voting majority in German commercial broadcaster ProSiebenSat1 (see page 28 for details). Permira and KKR were already partners in Dutch-based broadcasting group SBS, which itself controls 19 commercial channels, 20 pay channels and various radio and publishing interests, and their intention to merge the two operations was announced at the time of the ProSiebenSat1 acquisition. In July that merger was instigated following the acquisition of a 20 percent SBS stake from Dutch Telegraaf Media Groep in return for a minority-voting stake in ProSiebenSat1. The merger creates Europe’s second largest commercial broadcast group.

Dutch media group VNU was purchased a few years ago by venture capitalists and renamed Nielsen. The publications division formerly known as VNU Business Media was renamed Nielsen Business Media and several assets were sold, including all of its European publications. Nielsen Media, however, retained all publishing titles in the U.S., as they were not part of this sale. Last December, Nielsen Media sold some VNU European publications to 3i, a venture capital fund in the U.K., and, in turn, a few of them were subsequently acquired by Reed.

There have been fewer private equity deals in Australian media than in the U.S. and Europe — partly because so many assets were already owned by a relatively small number of entities and partly because they were already highly valued. But still, much has been happening. Interest kicked off in April when Australia’s government significantly relaxed its rules on media ownership prompting a spate of private equity backed bids, not all of them successful. Independent News and Media (INM) was thwarted in a bid for APN News and Media, despite upping its offer to a final figure of A$3 billion (U.S.$ 2.61 billion), excluding debt. Sir Anthony O’Reilly, INM’s chief executive, might have been frustrated by the failure, but APN’s shareholders were indubitably thrilled by the effect the attempt had on the value of their shares.

More fruitful was the association between private equity group CVC Asia Pacific and PBL, the company now run by James Packer following the death of his father Kerry. Last October, James sold half of the company’s assets (which included Nine Network) to CVC Asia Pacific forming PBL Media in a deal worth A$4.54 billion (U.S.$ 3.95 billion).

Back in the States, many of the Hollywood majors have been using private equity funds to hedge the risk involved in some of their most expensive movies, and — as was the case with MGM — buying studios outright. But there are signs that access to such funds is becoming both more difficult and more expensive.
Regardless of that, and the turmoil caused by the crisis in the U.S. mortgage market, the enthusiasm of private equity groups to borrow to acquire seems undimmed. In August, Blackstone closed the world’s largest-ever private equity fund at an eye-watering $22.7 billion. While it is true that the majority of these funds were raised before the current problems emerged, nothing that has happened recently has stopped KKR, PAI Partners and Carlyle Group from going to the markets for a reported $52 billion between them to fund leveraged buy-outs. The belief is that the current financial instability is good news for these companies, as it will tend to drive down the stock prices of the companies on their wish lists.

These sums are so large, and the companies being bought by the money private equity raises are so blue chip that it is difficult to speculate precisely what will happen if rates go up significantly, and the money underpinning them goes significantly AWOL (absent without leave). Right now one could only speculate that investors pour money into private equity funds because the stock market, with its poor growth and dread of dividends, does not offer a viable return. And since these funds don’t find good returns in the stock exchanges (in the past, some funds had to return money to investors for lack of investment opportunities), they are turning their attention to media companies with the clear intent of making a killing on the stock market (a.k.a. taking the companies public, once again) just as soon as the environment is nice and ready.