Arbitrage spreads, which measure the difference between the current and offered price of an acquisition target, have tightened on some closely watched leveraged buyouts — meaning investors are betting Wall St. will get to work closing the deals. 

Earlier this month the spreads had widened as tightening credit markets and fears of a global liquidity crunch turned a normal summer slowdown in mergers and acquisitions into a deep freeze. 

But arbs are growing confident again. Alliance Data, being acquired by Blackstone, has allowed the private equity firm to purchase shares before closing and said Blackstone had committed capital to complete the deal — positive signs that an arbitrage trader said were being reflected across LBOs. 

Also tightening spreads was news on TXU clearing hurdles and the Bush bounce, the trader said. 

Below are the current arbitrage spreads and those from August 10 for some closely watched LBOs.
    
 
    Target             Buyer                  Arb spread  
                                                      Current       Aug. 10
    ALLTEL           TPG; GS            4.7%           8.5%
 
    Cablevision       Mgmt                8.4%           9.9%
 
    Clear Channel   Bain                  5.7%         12.2%
                              
    First Data          KKR                 2.4%           9.5%
 
    Harrah’s            Apollo; TPG      4.9%           8.4%
 
    Hilton Hotels     Blackstone        3.7%          8.2%
 
    SLM Corp         JC Flowers      20.2%         24.5%
                              
    TXU                  KKR                 2.4%           8.8%

(Image credit. “1937 Labor Day Parade.” http://www.ufcw81.org/PublisherFiles/mid dle_years.htm)

Historically, August is a dull month for dealmakers as Wall Street heads to the Hamptons and European CEOs go on holiday. But this August marked the slowest pace for mergers since 2004, according to research firm Dealogic.

Hampered by tightening credit markets, which made it difficult to borrow money to fund deals, global mergers and acquisition volume dropped 25 percent from 2006. Worldwide M&A totaled $183.3 billion, which was the slowest August since 2004 and the weakest monthly tally since July 2005, Dealogic said.

In the U.S., merger activity dropped to $53.9 billion, down 22 percent from August, 2006. This month’s deals included private equity group TPG’s $395.5 million agreement to buy Midwest Air Group and pharmacy-benefits manager Medco Health Solutions Inc.’s pact to buy PolyMedica Corp. for $1.2 billion.

On the bright side, global M&A still is up 51 percent to a record $3.6 trillion this year, compared with the same period a year ago, boosted by frenzied dealmaking in the first half of the year. Year-to-date, M&A in the U.S. is up 36 percent from last year to $1.3 trillion. 

The Dealogic statistics are current as of August 29.

It’s been a good week for TXU. The Texas power company was saved from having to jump one hurdle between it and the closing of its $32 billion buyout and easily made it past another.

And the arbitrage spread on the deal - an indication of how likely investors believe a deal is to go through - shows it. It has narrowed to under 3 percent, which is considered within a normal deal range and a far cry from the 9 percent it was hovering at just a few weeks ago when it was seen as one Wall Street’s at-risk LBOs .

Its largest shareholder, Franklin Resources, has decided it will back the $69.25 offer from private equity firms Kolhberg, Kravis Roberts and Co and TPG Capital, reversing its earlier position that the number was too low. The shareholder vote is set for Sept. 7.

The reason points to the deteriorating credit markets, which have all but put a stop to new large-scale buyouts for the rest of the year. In a regulatory filing, Franklin Resources, which owns about 5 percent of the company, attributed the move to “changing market conditions” since its July 24 decision to vote against the deal.

It was never clear that a lot of shareholders shared its position - some told Reuters that they thought the deal would go through. But since TXU needs two-thirds of shareholders to back the deal, it had been an issue.

Also newly in TXU’s favor - all four of the proxy advisory firms, including the most influential one, Institutional Shareholder Services, have backed the deal. The ISS report, which came out earlier this week, pointed again towards the tighter credit markets as one reason to vote yes, saying shareholders would likely lose value if the deal did not go through because KKR and TPG has signed up for such favorable borrowing terms from the banks.

With most regulatory and political battles behind it, that sweetheart financing may prove to be the final hurdle to the deal’s closing, expected in October. Banks have been pushing private equity firms to renegotiate financing agreements with stricter terms in light of the changing appetite among investors for junk bonds, which has created a backlog of $330 billion of global debt.

Rumors last month that the banks - which include Morgan Stanley, Citigroup, Lehman Brothers, JP Morgan and Goldman Sachs - would walk away from the deal have been put to rest. But there are still lingering worries about TXU’s financing, Hilliard Lyons analyst David Burks wrote in an Aug. 30 research note. 

“There have been concerns raised that the financing of the transaction could be at risk due to the banks not wanting to take on additional debt during an onerous period in the credit markets,” he wrote.
       

Lone Star Funds, which has been seeking to abandon its purchase of Accredited Home Lenders Holding Co, is set to buy the struggling subprime mortgage lender for a reduced price of $8.50 a share. Accredited shares closed on the Nasdaq at $6.31 on Thursday.
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Vivendi dismissed recent speculation it was interested in buying German Pay TV broadcaster Premiere.
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Big U.S. and Canadian investors are set to push for the merger of TSX Group Inc and Montreal Exchange Inc. The exchanges have been in serious talks since this summer, the Globe and Mail reports.
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Nortel has joined the line of interested suitors in Tellabs Inc, according to a report in Web site Light Reading. Citing an unnamed Wall Street source, the telecom-industry focused Web site said Nortel is prepared to pay as much as $7.4-billion.
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With some deals looking shaky, the Deal Journal reports that peddlers of M&A rumors are starting to rear their heads again, noting that shares of Newmont Mining soared on rumors it would be bought by Barrick Gold for as much as $25 billion.
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China’s economic boom is driving up prices for bilingual bankers. Hedge funds and private equity firms, which are starting to source deals in China, are poaching bankers from Wall Street firms, making the hunt for already scarce talent even tougher.
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Thailand is pressuring Exxon and Chevron to make good on a pledge made 15 years ago to float shares in their local oil refineries in Bangkok next year. Many foreign investors are wary about Thailand after last year’s military coup.
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The storm in global credit markets has stalled Japanese leveraged buyouts and left banks exposed to unwanted risk, although deep-pocketed and conservative local banks are expected to act as a buffer. Deals disrupted by the credit squeeze include the syndication of buyout debt for MBK Partners’ acquisition of software firm Yayoi, Advantage Partners’ purchase of Tokyo Star Bank Ltd and Liberty Global Inc’s capital-raising, according to financial sources.
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Gottschalks Inc said it ended a strategic review that included a possible sale of the company, and decided to focus on a revised business plan to improve sales and operating performance as it posted a quarterly loss significantly wider than what analysts expected.

Microsoft late on Wednesday announced a deal to buy Parlano, a company that makes an online chat room application, for an undisclosed amount. 

The chat on Thursday though was whether Microsoft was looking at something much, much bigger — such as Research in Motion Ltd (RIM), the company that makes addictive email device the Blackberry.

Microsoft has been an active player in the M&A boom this year. In May, it announced its biggest acquisition ever with the $6 billion buy of Web advertising firm aQuantive Inc. Other deals it has done include July’s acquisition of AdECN, a stock market for buyers and sellers of Web advertising, May’s acquisition of a 4 percent stake in online jobs site CareerBuilder.com, and a deal in March to buy privately held speech technology company Tellme Networks Inc, valued at about $800 million according to sources at the time.

Then there is the shortlist of companies it’s been speculated to have be interested in — everything from Facebook (privately owned) to Yahoo (publicly traded), to Dow Jones (which has agreed to be bought by NewsCorp). Add to that list RIM, a rumor that keeps rearing its head. 

Microsoft can afford such a big appetite because of its high level of cash generation — it bought aQuantive for cash, rather than stock. But buying RIM would be another ball game - the company’s market value is more than $40 billion. 

To be sure, the RIM/Microsoft speculation isn’t new.  But would Microsoft, valued at around $260 billion, have the hunger for such a big deal? Reuters put that question to Rodd Langenhagen , managing director at Revolution Partners, which advised Parlano on yesterday’s sale to Microsoft.

“aQuantive was a huge deal by Microsoft’s standards,” said Langenhagen. “To see them do another would be a bit of a surprise, for sure. But with aQuantive they proved they’re willing to do billion dollar deals.”

Microsoft itself has indicated it wouldn’t rule out big deals. Chief executive Steve Ballmer in May said larger deals were “conceivable” but declined to comment when asked to drill down on size.  

Langenhagen added that while it would be out of character for Microsoft to look at a deal the size of RIM,  there are only a handful of buyers that could afford to buy the Blackberry maker. “So for nearly anybody it would be almost out of character,” he said.

Langenhagen sees Microsoft remaining on the hunt, though. “While this acquisition (Parlano) is key to protecting their core revenue base — the office communications base — Google is encroaching upon them… and they will continue to need to look for ways to more actively address on-demand applications and advertising-supported models.”

There may be a lot of hype out there, but overall, venture capital and private equity firms are indeed putting more money into the green energy sector.

And while U.S.-based investment in clean energy, which includes everything from solar technology to wind farms to ethanol, has lagged Europe in the past, it is on track to surpass it in 2007 for the first time.

Venture capital and private equity firms invested $10.6 billion in the first half of 2007 in clean energy and on an annualized basis, the majority of that spending will take place in the United States this year - the inverse of last year.

That overall pace of investment is up from 2006, when about $18.1 billion was invested in the sector, according to a report from New Energy Finance, a London-based research firm for the sector.

The amount that VC and PE firms will invest is expected to grow at a compound annualized rate of about 17 percent through 2013. And during that time, the report says to expect $262 billion worth of VC and PE deals to close, absorbing $146 billion of equity.

There is one caveat of course. The recent tightening in the credit markets has not yet had an effect on clean energy, but could slow growth in some areas, the report said.

The green energy movement is broad-based, with 1,859 venture capital and private equity investors having either made investments or stated their intention to do so and another 193 funds that invest in clean energy, according to the report.

During this year, like last, wind will get most of the annualized investment of $21 billion in the sector, followed by biofuels, biomass and waste; solar; efficiency, carbon and power storage; fuel cells and hydrogen and then geothermal, mini-hydro and marine and carbon markets, the report said. 
   
  

Oil and gas companies still stinging from last year’s deal price inflation - an increase of 55 percent from 2005 - may welcome the M&A slowdown that has come with a tightening of credit markets if it helps lower demand.

Driven by the need to put more reserves on their books, oil and gas companies fought each other and private buyers for assets, spending 80 percent more than a year earlier for just a 15 percent increase in proved reserves.

In all, they spent $91.8 billion on proved reserves, up from $51.5 billion a year earlier, according to a report from John. S Herold, a petroleum research company, and Harrison Lovegrove & Co., an energy corporate advisory firm.

Oil and gas companies also decided it was time to be more risky in what they did buy, nearly doubling their spending on unproved reserves to $47.4 billion from about $24 billion a year earlier.

They also increased the percentage of spending overall to build reserves that came from unproved properties to 12 percent in 2006 compared with 6 percent a year 2002, cutting back on development and exploration spending.

ConocoPhillips was the biggest spender of all, shelling out $42 billion for both acquisitions and development - three-quarters of which was on purchases. Much of that was wrapped up in its $34 billion acquisition of Burlington, the value of which has been questioned by many analysts.

Even after all that spending, oil and gas companies are still facing the same issues of growing reserves that they have always dealt with. Reserves for the 228 companies worldwide the report covered were up only 2 percent in 2006.  
     
     
    

It looks like newspapers are beginning to discover that it’s true what they say about property being a good long-term investment. Now that U.S. dailies are feeling the melancholy of their autumn years, they’re discovering that selling the house makes them feel young again.

From The Wall Street Journal:

With profits and revenue falling, newspaper companies are increasingly looking to real estate to shore up their finances. Though newspapers are still largely profitable, they are seen by many on Wall Street as a dying medium. In some cases, the Inquirer and the Boston Herald among them, financial pressures are forcing newspapers to sell their property as a quick way to come up with cash. In others, especially papers acquired by private-equity firms, the new owners are simply trying to squeeze as much money out of the operation as possible, says newspaper analyst John Morton, president of Morton Research Inc.

The Journal story in Wednesday’s paper says that the Philadelphia Inquirer building is up for sale, and that the Boston Herald, Minneapolis Star Tribune and The New York Times all are trying to throw some real estate overboard. The big undecided party now is Tribune Co., with the Journal reporting on speculation that Chicago real estate magnate Sam Zell could get rid of Tribune Tower and the Los Angeles Times’s headquarters.

What other papers are sitting on properties that could earn them a few shekels in an auction? Let us know.

PS - Hours after the Journal story ran, Jim Romenesko’s journalism blog posted a memo from Star Tribune Publisher Par Ridder saying that the Minnesota Vikings football team won’t buy four blocks of property that they had intended to from the paper.

Ridder: While we had reached agreement on a deal in principle, the collapse of the I-35W Bridge and the turbulent credit markets have caused the Vikings to reevaluate their plans. … We will be working with Avista [which bought the Star Tribune from McClatchy Co.] and our real estate advisors over the next few weeks to determine our next steps.

The SEIU, a large, U.S. service industry union, has taken its protest against what it calls “private equity excesses” to the Hamptons, where a lot of buyout bigwigs spend their free time in the summers.

So at 1pm on Wednesday, SEIU members are holding a mock protest in the Hamptons, as representatives of the “Southampton Alliance for Monied Estates” (SHAME) to demand more tax breaks for private equity “kings,” as the union calls them, according to the press release. The release’s sub-title: “Rally Around KKR’s Kravis at His Coastal Mega-Mansion as Market Slumps.”

The release goes on:

Southampton “residents” will take to the streets Wednesday to demand more tax relief for buyout billionaires, including longtime Southamptonite billionaire Henry R. Kravis, inventor of the leveraged buyout and pioneer of the trillion-dollar private equity buyout industry.The SEIU’s anti-private equity drumbeat comes as Congress weighs two bills aimed at raising taxes on buyout firms, which typically pay half the taxes that “normal” corporations pay.

The SEIU has been hounding the private equity industry, particularly in the wake of media stories detailing just how rich the LBO boom has made buyout executives. While the SEIU has focused a portion of their campaign on trying to educate the public about the LBO industry, they are quick to point out some of the job cuts that have resulted from private equity deals. In short, they’re attacking the private equity industry for hacking jobs.

The SEIU will assemble near what they say is the home of KKR co-founder Henry Kravis. The protest take place at the intersection of Main Street and Jobs Lane, in the Village of Southampton (yes, that’s Jobs Lane).

In the final line of the release, SEIU says “SHAME will call Wednesday for a takeover tax holiday to relieve buyout billionaires of the property taxes they pay on their Hamptons estates. Kravis, for example, pays an estimated $66,000-a-year in property tax his $16 million Southampton compound.”

Wait until the SEIU gets word of Leon Black’s Hampton’s bash, as reported in the New York Post. Black, the founder of buyout giant Apollo Management hired Tom Petty and the Heartbreakers for $1.7 million and four hours of entertainment, the paper says. That’s even more than Blackstone’s Stephen Schwarzman paid for Rod Stewart to play at his 60th birthday party. (To read Dealbreaker’s recent blog post on Schwarzman click here.)

(Photo: An 18,000 sq. foot waterfront estate in the Hamptons, at the time said to be the most expensive home ($45 million) ever sold in New York State.  Credit. New York Times, Dec. 31, 2004)

When someone tries to unload a house in need of serious repair, it’s not a money pit, it’s a “handyman’s dream.” Now E.W. Scripps Co. is putting its own twist on that selling point.

The newspaper publisher and cable TV broadcaster said on Tuesday that it is looking for a buyer for its afternoon paper in New Mexico. The Albuquerque Tribune has an average paid daily circulation of about 11,000, down from some 42,000 two decades ago. Not only that, it’s an afternoon daily, the kind of paper that’s been getting clobbered since World War II.

So who would want such a vintage property? Scripps doesn’t know yet, but made clear in the first paragraph of its press release that it will seek only “qualified buyers.”

At first, we thought that meant someone who’s into retro chic fashions, or someone who knows the secret formula to manufacture newspaper-blues repellent. Actually, a Scripps spokesman explained, that this means someone who not only names the right price, but wins the approval of the U.S. Justice Dept. The paper runs under a joint operating agreement with a morning daily in Albuquerque, and the agreement doesn’t expire until 2022. So whoever buys the paper needs to please Uncle Sam as well as Uncle Scripps.