Associated Press

Slam dunk, baby!

This week in private equity, in honor of the return of college basketball season, we are imagining for a moment that we are Dick Vitale, and proclaiming loudly and abnormally cheerfully (inside our heads, to avoid freaking out our co-workers): Buyouts are back, baby! How do we know? Well…

Blackstone Group, via portfolio company Pinnacle Brands Corp., agreed to buy Birds Eye Foods Inc. from Vestar Capital Partners Inc. for some $1.3 billion, only the latest large-although-of-course-not-as-large-as-large-used-to-be deal that proves buyout firms aren’t entirely dead just yet. Additionally, it’s putting just $300 million of equity in, our Wall Street Journal colleagues said, and leveraging the deal at five and a half times Ebitda. That level of debt would have been unheard of as recently as, say, August.

It’s not just higher debt levels on new deals. Attendees at a conference put on by the Deal this week said they’re starting to see banks offer money for dividend recaps, which we thought might have been entirely killed off, forever, by the New York Times’ evisceration of them in its recent story on Simmons Bedding Co.’s bankruptcy. Paul Salem, co-founder of Providence Equity Partners, said his firm recently received an offer of five times leverage from banks to do a dividend recapitalization, adding, “Boy, memories are short.” In specific recap news, wireless tower company TowerCo LLC plans to return a dividend to backers Tailwind Capital, Soros Fund Management LLC, Vulcan Capital and Altpoint Capital Partners (formerly Stone Tower Equity.) This story got us thinking about cellphone trees – people sometimes criticize the faux trees for pretending they fit in, but the fact that certain real trees remind us of cellphone trees is a credit to the industry.

If that’s not enough for you, what about paid-in-kind debt? Yep, that’s back too. According to our colleagues at Dow Jones Newswires, janitorial supply company JohnsonDiversey Inc. is planning to sell $250 million in PIK bonds to help finance its recapitalization by Clayton Dubilier & Rice Inc. As an aside, what if PIK bonds were payable not in more bonds, but in products made by the company? Then maybe JohnsonDiversey’s bankers could strike a side deal with Carlyle Group…

Which is our next case in point on the buyouts are back tip. Carlyle, still a “diaper dandy” in the infrastructure space, has gone and done itself its first public-private partnership deal, teaming with a number of other parties including the Service Employees International Union to land a contract to run highway rest areas in Connecticut. We already poked a bit of fun in Carlyle’s direction on this - it’s not every day you do a deal with someone who says you’re engaged in the “sewer sludge business” - but we actually think this consortium is sort of a genius way to advance infrastructure investing in these United States. Public-private infrastructure partnerships are eyed skeptically by politicians and unions, who worry that such deals will pad the pockets of investors while leaving roads filled with 2012-sized potholes. But this one will add jobs, and by getting the SEIU on board, Carlyle took care of one potential critic.

Elsewhere, Apollo Management LP is pushing ahead with its long-time plans to list its shares on the New York Stock Exchange, according to the Financial Times. We haven’t seen a PE firm list here since Blackstone did it in June 2007, so we’ll definitely take this as a sign that the industry is back, despite our puzzlement that Apollo would try this in light of recent negative press.

We think that’s a lot of convincing evidence in favor of fitter, happier, slightly more cautious and better informed buyout boom number two. But like any good journalist, we must point out the countervailing evidence. Bankruptcies aren’t yet past: Wind Point Partners-backed Taylor-Wharton International LLC, a maker of storage products for gases and liquids, filed this week. An IPO by Healthport Inc., backed by Abry Partners, was postponed. Terra Firma is still fighting with Citigroup Inc., and perhaps Lily Allen, over restructuring struggling record company EMI Group. TPG Capital LP plans to further cut its financial services fund, to a mere $2.5 billion, as it isn’t seeing much in the way of investments in that sector. And Johnny Depp was named Sexiest Man Alive by People magazine, which we feel is a slight to impeccably groomed and suited buyout executives everywhere.

Have a great weekend.

-With Josh Beckerman

Associated Press

The beauty of private equity firms going public is that you get all sorts of details on the health of their portfolios that you might otherwise not.

On page F-39 of KKR & Co.’s third quarter financial report, for example, we learn how its KPE Investment Partnership is valuing some of KKR’s biggest deals. Of KPE’s eight biggest portfolio company investments (including its portion of KKR’s funds as well as co-investments it made alongside them), it’s holding three at or above cost, and five below cost. This doesn’t include all of KKR’s big portfolio companies, but it’s a good cross-section.

Here’s a rundown as of Sept. 30:

In this morning’s media roundup:

News: KKR & Co. (nee Kohlberg Kravis Roberts & Co.) said its third quarter economic net income was $656.6 million, a reversal from an economic net loss of $465.6 million a year ago. The LBO Wire story is here and includes details on potential clawbacks and how the firm valued Energy Future Holdings Corp. at Sept. 30.

Our colleagues at the Wall Street Journal yesterday brought you word of Blackstone Group’s purchase of Birds Eye Foods. Today, we tell you how seller Vestar Capital Partners made out, in LBO Wire.

Archipelago Learnings Inc. was not dissuaded by ABRY Partners-backed HealthPort’s IPO withdrawal. The online education company, backed by Providence Equity Partners, priced its IPO at $16.50 a share. The range had been $15 to $17. Meantime, Hellman & Friedman LLC is also joining the IPO rush, planning an offering for portfolio company Gartmore Group Ltd. on the London Stock Exchange. The Dow Jones Newswires story is here.

Ron Burkle is doing some distressed debt investing, taking a stake in struggling retailer Barneys New York, which may displease private equity owner Istithmar. The WSJ story is here.

Analysis: The Economist delves into the EU’s proposed Alternative Investment Fund Managers directive and relays to us the verdict of one fund executive on how it’s like a fight in a bar: “You don’t hit the man who started it. You clobber the person you don’t like instead.”

Just for fun: The Reformed Broker puts together a list of investing fad and themes by year, from 1996 on. Check out 2007.

Associated Press

The Service Employees’ International Union has been one of Carlyle Group’s strongest critics. Now, it has teamed up with the firm to help it win a deal.

Carlyle is a member of a group that has landed a 35-year public-private partnership deal with Connecticut to redevelop, operate and maintain the state’s 23 highway service areas.

The group will invest some $178 million to renovate highway service areas on Interstate 95 and 395, as well as the Wilbur Cross and Merritt Parkways, putting in improved gas stations, as well as Subway and Dunkin’ Donuts restaurants. In the process, it will create some 340 jobs, according to a press release posted on Carlyle’s Web site.

Besides Carlyle (which is one of Dunkin’ Donuts’ owners) and Subcon Inc. (the master franchisee for New York and Connecticut of Subway Restaurants’ parent company, Doctor’s Associates Inc.), the group includes several other local Connecticut businesses, like construction manager Centerplan Cos., architectural firm BL Cos., and facilities manager OR&L Facility Services Co. Perhaps the strangest angle here, however, is that members of SEIU Local 32BJ, who will provide custodial resources, were also part of the consortium.

“We brought them on as a partner…during the discussion,” said Barry Gold, co-head of Carlyle’s infrastructure team. “This is a great chance to work with them for a common goal.”

Lest we forget, that’s the same SEIU that shut down Carlyle Group co-founder David Rubenstein for some half an hour at the Wharton Private Equity and Venture Capital Conference in January 2008, that generated controversy by distributing a map of buyout-backed businesses in Times Square including Dunkin’ Brands, and that has carried out numerous protests against the firm related to its ownership of such businesses as nursing home operator Manor Care Inc. and Synagro Technologies Inc., referred to by SEIU in the past as a “sewer sludge business.”

“We are proud to be part of this important project, which will benefit our state and create good jobs for our members,” SEIU district chairperson Kurt Westby said in a statement. Westby wasn’t available for comment.

Lions and lambs have indeed laid down together, although we’re not exactly sure who the lion is here.

-With Shasha Dai

Getty Images

Who doesn’t enjoy it when Web-fueled underdogs strike it big in the entertainment business? “Six months ago I was a bartender in Williamsburg and now I have an iPod commercial” and such. The pop culture gatekeepers have given way to YouTube democracy, I may have read on a blog somewhere.

An online alliance announced yesterday is playing it a bit safer, though.

EMI Music, backed by Terra Firma Capital Partners Ltd., reached an agreement for Hulu to show concerts and videos for EMI’s artists. Hulu is owned by Dow Jones parent company News Corp., NBC Universal, Walt Disney Co. and Providence Equity Partners. Fans of EMI acts like Red Jumpsuit Apparatus and Care Bears On Fire may eventually get their day, but the first offering under the EMI-Hulu agreement is a Norah Jones page, coinciding with the mega-platinum crooner’s new album “The Fall.”

I am not a contributor to Ms. Jones’ 37 million album sales so this won’t change my life, but perhaps there’s some meaning here for those interested in the debate over video “monetization” and the decline of recorded music sales. The site will include the complete catalog of Norah Jones music videos, which may not be a huge deal since the assortment of Jones videos available on YouTube is probably sufficient for most people.

More impressive is the inclusion of several concerts, including a Nashville show with guest appearances by Dolly Parton and Gillian Welch. In general, there aren’t a ton of full-length concert videos online, and presumably those on Hulu won’t be from cellphone video.
EMI says it’s the first major music company to offer concerts and videos from its artists via Hulu. The company, which owns the Virgin, Capitol and Blue note labels, didn’t specify what performer it will spotlight next.

While Hulu’s Big Media pedigree contrasts with YouTube’s abundance of funny cats and junior high kids channeling Kelly Clarkson, YouTube has some serious music partnerships of its own, including an agreement with EMI signed in May 2007. YouTube, owned by Google, has a deal with Vivendi SA’s Universal Music Group, and it recently resolved a nine-month licensing dispute with Providence-backed Warner Music Group with an agreement that gives Warner some ad revenue. Also, YouTube, Universal, Sony Music Entertainment and Abu Dhabi Media Co. are backing a stand-alone music video site, Vevo.com.

One editorializing aside to industry participants: promoting already-famous types likes Norah Jones may be a sound business decision, but if you can find some videos from Cruel Story Of Youth, The Unforgiven and The Pursuit Of Happiness, you will have some of my entertainment dollars.

In this morning’s media roundup:

News: The deadline for bids on Stanford University’s alternative portfolio is today. According to our colleagues at the Wall Street Journal, bids top $1 billion, but include conditions on things like who gets distributions first that Stanford may find tough to stomach. (We’re thinking the conditions may look something like what we described here.)

Earlier, we wrote about various firms that might be interested in some of Cadbury or Kraft’s assets (or Hershey’s, we suppose), if those companies end up combining. Blackstone Group was one prime candidate, thanks to its ownership of a similar company, Pinnacle Brands Corp. But that packaged-food company may have its hands full with its acquisition of Birds Eye Foods, which the WSJ reported is imminent today. The seller of Birds Eye is Vestar Capital Partners, which we suppose might now have a bit more of a taste for another food deal.

The New Mexico State Investment Council has released copies of subpoenas it received from various government bodies related to ongoing pay-to-play investigations. Sought are documents on Aldus Equity, as well as anything on third-party marketing firms related to Marc and Anthony Correra. The LBO Wire story is here.

It’s like the Neverending Story, but without the fantasy. Another private equity firm may be interested in another part of Nortel Networks’ auction of its assets (here, a summary of previous such interest), as various news services report that Nokia Siemens Networks has teamed up with One Equity Partners on a bid for the optical networking and carrier ethernet operations. Read about it here.

Analysis: Blackstone Group CEO Stephen Schwarzman muses about life, private equity and everything in a 20-minute interview on CNBC. There’s a lot of talk about the “beaten up and damaged U.S. consumer,” and even more about the growing power of China. Schwarzman says rather than look at the world geographically, investors need to start thinking about it in terms of “who China touches.”

Just for fun: Private equity keeps on talking about renaming itself again. If it does, after reading this piece from Jason Zweig of the Wall Street Journal about ‘WACronyms’, we think it should rename itself something like “Chunta,” rather than something like “Vaiveahtoishi.” On the other hand, maybe it should just go back to “LBO,” which the article implies is as cozy and familiar as a cup of hot cocoa and a snuggie on a raw winter day.

Joseph Bae, one of the Kohlberg Kravis Roberts & Co. deal-makers behind the Oriental Brewery Co. acquisition, more recently targeted a different takeover target: a 760-gram white truffle from Italy. He and an assortment of other Hong Kong residents bought the thing for $129,000. But before you declare this to be Chairgate II - proceeds went to charity, the Wall Street Journal reports.

Reuters

Evidence of the cellphone industry’s strength is everywhere, like on the New Jersey Transit train last weekend, where typical proclamations like “We just passed Metuchen” were augmented with a loudly spoken medical monologue.

So it’s not surprising that TowerCo LLC is planning a relatively rare dividend recapitalization.

The cellphone tower company, backed by Tailwind Capital, Soros Fund Management LLC, Vulcan Capital and Stone Tower Equity Partners (now Altpoint Capital Partners) is proposing a $240 million credit facility. The financing will include a $200 million five-year term loan and a $40 million revolving credit facility. The bulk of the term loan proceeds are going to the firms, with the credit facility slated for corporate purposes, Chief Executive Richard Byrne said. Each firm owns about 25%, not including a performance-based equity ownership plan for management.

Tailwind co-founded TowerCo in 2004, investing about $20 million. Soros joined in a year later, matching Tailwind’s investment, according to Byrne. The firms made back about three times their money in 2008 when TowerCo sold 24 towers to SBA Communications Corp. for $191 million.

Soros and Tailwind joined Vulcan and Stone Tower in a $740 million financing round for TowerCo later that year, Byrne said. The bulk of that backed a move to acquire 3,300 wireless communications towers from Sprint Nextel for about $670 million in cash in 2008.

TowerCo is still expanding at a clip of about 100 towers a year, Byrne said, though the bulk of revenue growth comes from adding carriers to existing towers. The company generates about $110 million in revenue and $36 million in Ebitda. TowerCo, of Cary, N.C., has 66 employees.

Dividend recaps were a popular way to take money off the table in the boom years but have been few and far between in the recession. Recaps by financial sponsors peaked at $73.2 billion globally in 2007, falling to $1.9 billion in 2008, according to Dealogic.

Kohlberg Kravis Roberts & Co. and its co-investors received $239.3 million from Dollar General Corp. in September. Willis Stein & Partners is taking a $75 million dividend from Roundy’s Supermarkets Inc., a source said last week. Earlier this year, Wellspring Capital Management took $40 million out of Vatterott Educational Centers Inc. and PNC Equity Partners received a dividend from Griffith Energy Inc.

Morgan Stanley is leading the debt-raising efforts with participation from Jefferies & Co. The facility is expected to close by Nov. 30.

Standard & Poor’s Ratings Services assigned a B+ corporate credit rating to TowerCo, with a stable outlook. S&P said high leverage “overshadows the company’s strong investment-grade business risk profile.”

Moody’s Investors Service assigned the company a B1 corporate family rating and a stable outlook. Moody’s said the company’s leverage ratio is “relatively high,” but predicts industry fundamentals should “enable TowerCo to grow revenues and cash flow at sufficient levels to facilitate comparatively rapid deleveraging of its balance sheet.”

-With Josh Beckerman

AAA invests in some of Apollo’s funds and alongside it in some deals, so the fortunes of the two are closely linked. We extrapolate good news for Apollo, as AAA’s results show a distinct upturn. The fund’s net asset value at Sept. 30 was $1.26 billion, up $287.1 million from June 30, as the valuations of its investments improved. AAA also said that during the third quarter it resumed making co-investments selectively alongside Apollo’s funds, something it had stopped doing in November of last year.

Driving the improvement was appreciation of $187.4 million in private equity co-investments, particularly of companies in the leisure and manufacturing sectors, as certain investments restructured their debt and implemented cost saving initiatives.

“Apollo has been one of the most active sponsors in leading debt exchanges to extend maturities and reduce liabilities across its Fund VI portfolio companies,” AAA said in a slide deck accompanying its earnings presentation. Since Dec. 31, companies in this fund have reduced debt maturities over the next four years by $752 million, and have reduced debt maturities due from 2013 through 2016 by nearly $13 billion, the firm said. They’ve also completely eliminated over $7.5 billion of debt.

Capital markets investments showed appreciation of $100.7 million for the three-month period, as AP Investment Europe Ltd. in particular showed improvement.

Still, AAA’s recovery is not complete. A chart depicting its private equity co-investments shows that even though fair value has improved substantially to $884.9 million as of Sept. 30, it remains well below the firm’s original cost of $1.43 billion.

AAA in October permanently reduced its revolving credit facility to $675 million by repaying $225 million to the facility’s lenders. At Nov. 16, it had $439.6 million in cash and $675 million of borrowings outstanding.

Associated Press

Careful not to get any up your nose!

The credit markets have definitely started to come back, as shown by the pick-up in corporate merger and leveraged buyout activity over the last few months. In fact, the velocity and scale of the debt market recovery has surprised some veteran deal makers, such as Paul Salem, co-founder of buyout firm Providence Equity Partners Inc.

Speaking at a conference, Salem told the story of a Providence portfolio company whose earnings before interest, taxes, depreciation and amortization, or Ebitda, have grown significantly over the past few years, enabling it to cut debt to four times Ebtida from eight times immediately after the buyout.

Providence recently received an offer of five times leverage from banks to do a dividend recapitalization in order to cut a check to its sponsors, Salem said.

“It’s déjà vu,” Salem told the Deal Economy 2010 conference in New York. “Boy, memories are short.”

His comments were echoed by Leon Kalvaria, vice chairman of Citigroup’s institutional clients group. Kalvaria said Citi is working on several dividend recaps right now.

“(Payment-in-kind) toggle notes are back, which I thought had been permanently buried,” Kalvaria said.

It isn’t clear this is a good thing; Salem, for one, appeared to be at least mildly humbled by the credit crisis. “Private equity absolutely was borrowing too much money,” he said. Still, he said, new deals will get done no matter what, because the industry is sitting on some $500 billion to $1 trillion of dry powder globally.

“People will have to learn lessons, but they are going to have to learn new lessons,” Salem said.

Despite the return of lending, dealmakers said the recovery is still wobbly, and that it will be a while before any deals approaching $20 billion in size get done.

“We have not seen really, really robust competition among lenders,” Herald Ritch, chief executive of advisory firm Sagent Advisors Inc. “It’s the third inning of credit recovery.”

In this morning’s media roundup:

News: TPG and American Airlines are experiencing some turbulence in their bid to prop up Japan Airlines. Delta Airlines and its SkyTeam Alliance partners have offered a $1.2 billion funding package in hopes of luring JAL away from the Oneworld Alliance in which AA is also a partner, according to The Wall Street Journal. Looks like a SkyTeam/Oneworld Alliance smack down is set to ensue. Sounds almost as awesome as X-Men v. Street Fighter!

PE seems to be the place to which everyone migrates after they’ve either reached the pinnacle of their careers or after enough time has passed that people may have forgotten past indiscretions. We’re not sure if the latter yet applies for John Thain, but he is nonetheless mulling “a range of private equity types of things,” according to Reuters.

Ron Burkle has been putting his money where your mouth is, buying up stakes in Whole Foods and A&P. Now he’s scooping up reading material as well. In recent weeks, Burkle’s investment firm, Yucaipa Cos., has spent $80 million to more than double its stake in Barnes & Noble. In response, B&N adopted a shareholder rights plan with a 20% trigger. Read the Dow Jones Newswires story via LBO Wire.

Apollo is readying its move to the New York Stock Exchange, according to the Financial Times. This move has long been in the works, and Apollo already trades sort of publicly, on the impossible-to-remember-the-punctuation-of Goldman Sachs platform GSTrUE. Still, it’s a little surprising that the firm would move ahead with the NYSE listing, given the depressed economy and its pay-to-play problems in California. More to come once the S-1 filing is out.

Analysis: The New York Times Dealbook has a Q&A with Rep. Paul Kanjorski (D- Penn.) to discuss an amendment he introduced to the financial regulatory reform bill that would allow the government to break up financial institutions deemed “too big to fail,” even if they are well capitalized and healthy. Says Kanjorski, “the fact that the government will have this power, I think, will ensure that it is highly unlikely that they will ever use it.” The language of the bill also includes hedge funds, but “there aren’t too many hedge funds that are that large that could bring down a system.”

Just For Fun: Are you following a private equity cowpath?