Commentaries

Is BlackRock going to rule the world?

It’s amazing how well the company has positioned itself to clean up the mess left behind by the financial crisis. It already has chummy ties with the government, including the Federal Reserve which tapped it to manage and eventually liquidate toxic assets the central bank took on from AIG. It’s also the risk and analytics manager in chief for the Fed’s MBS purchasing program.

The Wall Street Journal reports today that the National Association of Insurance Commissioners is also considering the giant money manager to sub for the rating agencies, which the insurance industry blames for getting insurers into such a pickle with structured finance investments.

BlackRock Inc., which scored multiple government assignments during the financial crisis, is a contender for another prestigious gig: helping state regulators size up risks in insurers’ investments.

The money manager and risk-advisory outfit is among a handful of firms that have talked with officials from the National Association of Insurance Commissioners lately about possibly taking on a slice of work now done by the major ratings firms, according to regulators and an official at the NAIC.

The article goes on to say that PIMCO could also be in the running.

The insurance lobbying outfit, the American Council of Life Insurances, is behind the plan to anoint a third party to run risk models on bonds back by mortgage bonds held by insurers. The thinking is that rating agencies aren’t properly measuring loss risk and the end result is insurers are being forced to tie up too much capital to comply with exisiting regulations.

First, I’m not sure it’s such a great idea for the insurers to set aside less capital rather than more given their exposure to residential and commercial mortgages. Second, is it a good idea to have big money managers also deciding how risky certain investments are for an industry that invests trillions in bonds?

Schh…Orangina Schweppes bound for Japan

There’s an almost palpable sigh of relief in the statement from Blackstone and Lion Capital confirming the two private equity firms have received a “binding offer” from Japan’s Suntory for Orangina Schweppes.

It discloses little beyond Blackstone and Lion saying they will only be able to decide whether to accept the offer “once the necessary social, legal and regulatory steps will have been completed”.

All that of course involves lots of red tape — so it may take some time — but you can be sure Blackstone and Lion will be doing everything they can to speed the process along — wishing the days away and hoping that their luck holds.

Finding a buyer like Suntory apparently willing to pay somewhere between $2.6 and $3 billion for Orangina at this point in the cycle gives Blackstone and Lion the perfect exit. Suntory could be paying them up to twice 2008 sales and more than they paid in 2006 to get hold of Orangina and its European brands.

The duo crow that since they took over in 2006, Orangina has “achieved industry-leading growth, both organically in its core countries and by expansion into new markets, and through strategic acquisitions of leading brands”. Volumes and sales have both risen and Orangina Schweppes is now the second largest producer in Europe’s still soft drinks market.

Blackstone’s chief operating officer Tony James said last week that the private equity group would look to get out of investments if there was an opportunity for long-term value and noted that flotations are once again a possibility.

That begs the question why Blackstone — with $28 billion in its coffers to invest — and Lion have decided to go with Suntory rather than an IPO for Orangina.

Suntory goes for it with Orangina bid

True to its “Yatte Minahare” motto — “Go for it!” in Osaka dialect — Japanese brewer Suntory is sizing up a takeover bid for private-equity owned soft drinks maker Orangina Schweppes.

Although Suntory is already in the midst of a takeover by larger rival Kirin, that hasn’t quenched its thirst for growth as it looks to Orangina for new brands and markets.

But splashing out $2.6 to $3.0 billion — the price range being touted for the somewhat eclectic Orangina drinks cabinet, whose brands include Snapple, Oasis and La Casera — would be pushing Suntory’s mantra to the limit. The mooted price is in line with what current owners Blackstone and private equity partner Lion Capital paid for Orangina three years ago, when the credit boom was in full swing.

Orangina has added some bolt-on deals since but its sales in 2008 –  before the recession fully began to bite  — were some $1.46 billion, so Suntory would be paying more than twice that figure to take the company off the hands of Blackstone and private equity partner Lion Capital.

By comparison, British soft drinks group Britvic – with net debt of 400 million pounds — has an enterprise value of 1.14 billion pounds against revenues in 2008 of 927 million pounds, an EV/sales ratio of 1.2.

Some 80 percent of Orangina’s revenues come from its household names — Orangina, Schweppes, Oasis, Trina, Pulco and La Casera — which are among a total of 22 brands. The group has targeted strong positions in local markets with these which should mean sales will remain fairly stable.

While Japan offers limited growth, Suntory can’t be looking to countries like France, Spain, Italy, Belgium or Britain for stellar expansion. The only growth market of any size where Orangina — which boasts some 500 million customers in 60 countries — owns a local brand is Ukraine.

British Land’s best assets – its liabilities

British Land is in a good position to take advantage of opportunities. We know because the chairman told us. Why then, is he supposed to be contemplating selling a stake in London office complex Broadgate to Blackstone?

Given how far prices have fallen, the timing looks odd, especially for a company that claims to be in a solid financial position. However, it may make more sense than it appears to. Bank lending and property markets are soft, but the peculiarities of Broadgate’s debt structure may make it worth while for both sides.

Broadgate, now over 20 years old, is showing its age and, at 2.2 billion pounds, is an uncomfortably big lump in British Land’s portfolio. Selling a stake would allow the company to reduce risk and diversify its business.

For a buyer, the attraction lies as much in the quality of Broadgate’s liabilities as those of its assets. The estate may need some work, but it has a state-of-the-art pre-credit crisis debt structure, which any buyer would inherit.

The complex carries 2 billion pounds of debt paying interest of 5 percent, a rate so low that if the loans were quoted, they would stand about 570 million pounds below par. This is equivalent to 61 pence a British Land share, about half of the mark to market gain of 119 pence that British Land recognises on its debt in its triple-net NAV figure.

The stock market may debate whether to recognise this gain, but a private equity firm like Blackstone would certainly value that cheap debt highly.

There is little current equity in Broadgate, and a half share might fetch only about 100 million pounds, but a leverage of about 10 times would produce a supercharged return if the buyer was prepared to wait for property prices to recover. The lack of any loan-to-value covenant in the debt reduces the risk of a breach if markets deteriorate further.

Cash M&A still lifeless

Bond sales are at a record, equity markets are at year-highs, private equity firms are sitting on huge cash piles — Blackstone alone has $29 billion — and banks are lending to each other again.

The ingredients should all be there for a resurgence of cash-driven mergers and acquisitions. But instead, the market is in hibernation.

So far the value of all M&A deals completed this year totals $990 billion. You have to go back to 2003 — when the total for the year was $1.23 trillion — to find a figure this low, according to Thomson Reuters data.

Of this, some $364 billion — just 37 percent — were cash deals, marking a dramatic shift in the mix of recent years when cash has dominated.

The main spanner in the works is the still dire state of banks’ balance sheets and the crippled syndicated loan market. This has kept a tight lid on cash bids of any size, with the mega merger or takeover a distant memory.

Most banks are doing all they can to shrink their balance sheets, guard against problem exposures and to lend to their best clients. As a result, global syndicated loan volumes hit their lowest monthly volume since 1993 in July.

True, corporate bond issuance is booming and companies are raising equity, but this is not going to be enough to fill the void. And even if companies are confident of being able to fund their purchases with bonds, they first need to find a bank to give them a bridge loan.