The private equity industry has suffered a tough week on the public relations front.

First, there was a protest in New York that, while tiny, didn’t help the industry’s image any. Its theme: private equity’s tax treatment in general and that of Carlyle Group’s CEO David Rubenstein in particular. While private equity firms didn’t design the tax code, it hardly plays well in print that Rubenstein’s tax rate on a significant part of the firm’s profits is 15 percent, while many cops and teachers out there pay 35 percent.

Then there was the fallout from private equity buyers’ decision to back out of their deal to buy Harman Industries International, which has sent the company’s shares down around 30 percent since Friday morning. The withdrawal was an added blow on the PR front in that the deal was supposed to allow Harman shareholders to keep an equity stake in the company. How do fund managers feel about the buyers — KKR and Goldman Sachs — now?

Then, finally, there was the front page New York Times article on Sunday titled “At Many Homes, More Profit and Less Nursing.” It focused on Warburg Pincus portfolio company Centennial Health Care, and its Habana Health Care nursing home. 

The story doesn’t exactly paint the private equity owners in a positive light. Warburg Pincus declined to comment for the story. It’s bad enough when private equity owned widget makers cut jobs.  But when cuts allegedly hit the operations of a nursing home, it’s truly a an image fiasco. The article focuses on a family whose mother died from a feces-infected bedsore at the home.  The Times offers its own analysis on cost cutting at nursing home facilities across the U.S. in its several thousand word story, equipped with charts and graphs.

The buyout industry formed a trade group this year to help promote its image. After last week, they’re going to need to earn their keep .

Washington insiders believe President Bush is unlikely to support raising taxes on private equity firms or any other investment funds for that matter, but discussion of the issue is heating up.

What do you think? Should private equity firms pay higher taxes on the profits they earn?

Currently, these funds pay 15 percent capital gains taxes on their profits, which are known as “carried interest”. Most funds charge a management fee (2 percent), give back 80 percent of the profits to investors and keep 20 percent (carried interest).

Two bills under consideration would lift taxes on carried interest on certain funds to 35 percent from 15 percent.

How much the government would earn as a result of the bump is unclear. How much the bump would hurt buyout firms is also unclear, though evidence emerged in the last few weeks that it wouldn’t be much of a hit. Carlyle Group Co-Founder David Rubenstein offered some colorful comments last week on the matter, in response to a protest of his pay package.

Deals are being dug up in the commodities arena, defying the credit pressure that has choked off so much of the merger stream since the summer. Meridian Gold’s board has approved a raised bid from Yamana Gold, ending an extended and often hostile takeover battle. Yamana boosted the cash component of the offer by 50 Canadian cents to C$7.00 per share. Yamana will extend the offer to midnight Oct. 12. Yamana’s revised offer represents a spot premium of about 38 percent. The deal is one part of a three-way tie-up that Yamana is pursuing to create a mining company with gold production of 1 million ounces this year.

From Australia overnight came two commodity-related deals: Gindalbie Metals offered A$1.6 billion ($1.4 billion) for West African explorer Sundance Resources, and Orica, the world’s biggest explosives maker, agreed to buy Excel Mining Systems from U.S. private equity firm Snow Phipps Group for US$670 million. Iron ore miner George Jones, who is chairman of both Gindalbie and Sundance, has given his blessing to the Sundance deal, as has its largest shareholder, Australian mining magnate Ken Talbot’s Talbot Group Holdings, which has 19.9 percent. 
    
This month, Australian iron ore miner Territory Resources watched its cash and share offer for manganese producer Consolidated Minerals dissolve as an all-cash battle between two private groups — Pallinghurst Resources in Britain and Palmary Enterprises in Belize — for Consolidated went from around A$500 million to A$1 billion. With analysts predicting that the prices mining companies charge steel mills for iron ore are set to rise for a sixth straight year, iron ore has become a sought-after commodity. Rio Tinto and BHP Billiton are both spending billions of dollars to expand production in the iron ore-rich Pilbara region in Australia, near the mid-west region deposits held by Gindalbie.
    
Orica, the world’s biggest explosives maker, said the acquisition of Excel, which makes roof support products for underground mines, would be immediately earnings per share accretive and was complementary to the UK mining services business Minova that it bought in 2006. Orica said earlier this month it sees significant profit growth this year, with a global mining boom, driven largely by strong demand for minerals from China, boosting earnings at its mining services division. 
    
China Eastern Airlines hit turbulence in Hong Kong on Monday after the Wall Street Journal reported that the fate of a Singapore Airlines stake purchsae was up in the air. It reported that Cathay Pacific Airways is also seeking to take a piece of the Chinese carrier. But by the end of trade in Hong Kong, with no deal announced, investors had cashed out of China Eastern, selling it down 10.5 percent. Cathay and Air China said they would release statements later on Monday to clarify the situation. CLSA analyst Adrian Lowe said a China Eastern investment was unlikely, arguing instead that Cathay and Air China might be on the brink of announcing an asset or share swap. Speculation in recent days has ranged from a potential bidding war between the Cathay and SIA camps to a government-led takeover of China Eastern. 
    
The Deal Journal offers this take on the winners and losers in the Harman International Industries drama. Kohlberg Kravis Roberts and Goldman Sachs Group’s private-equity arm said on Friday they would walk away from their $8 billion buyout agreement for the audio-equipment maker.
    
Investor demand for leveraged loans and bonds has improved, Bloomberg News said, sourcing Bank of America analysts. Their research showed banks had reduced the backlog of unsold corporate debt by 2 percent in the past two weeks to $370 billion. “The door creaks slowly open in credit markets,” strategists led by Jeffrey Rosenberg said in a research note. “Clearly credit conditions have improved.”  
 

The Gulf just went on a one-day spending spree.

Borse Dubai kicked off the day by simultaneously purchasing a third of the London Stock Exchange and a fifth of Nasdaq. With Stockholm-based OMX in the mix, the month-old Dubai bourse suddenly catapulted into a position to challenge NYSE Euronext with its own global reach.

Not to be outdone, regional rival Qatar said in response that it bought about a fifth of the LSE as well as just under a tenth of OMX.

Separately the investment arm of Abu Dhabi bought a 7.5 percent stake in private equity firm Carlyle for $1.35 billion.

There’s more here than petro dollars burning a hole in the Gulf’s pocket: These states are keenly aware that their oil dependent economies need to diversify into something more sustainable — hence their forays into tourism and finance.

As oil hits record prices, they’ve got the buying power to realign the global economic balance — after all, two Gulf states suddenly stand to own nearly half of the LSE and analysts say Dubai may eventually control Nasdaq.

With the public markets cooling on asset managers and pressure on exchanges to expand their footprint, we can expect similar deals. But there are only so many worthwhile targets — meaning there may be a few bidding wars as the clock ticks on fossil fuels.

“I get the sense that I’m disrupting my family’s routine … They are used to me not being there … And now, sure they are glad to see me, but I’m definitely in the way.” — head of the telecommunications and technology group at a large investment bank explaining the difficulty he faces when he comes home earlier than usual because of a slowdown in the deals market.
    
“I do not consider that we should create a monster, which would dominate throughout Russia’s economy and would drain all the resources, including banking resources, like a vacuum cleaner,” – Russian President Vladimir Putin on speculation about a merger of Rosneft and Gazprom to create a giant energy company.
    
“Firing sessions need to be short. You say, ‘Things aren’t working out.’ If you engage with them, it will turn out badly. I don’t engage in those conversations. I don’t want to go through the justifications.” Harvey Golub, Chairman Ripplewood Holdings, and former CEO of American Express, on how to fire someone.
 
“It’s all posturing — if egos get in the way here, you could see this thing get ugly and it does go to court.” — John Orrico, portfolio manager at the Arbitrage Fund in New York, on the dispute between Sallie Mae and a consortium that agreed to buy it for $25 billion.
    
“Sallie Mae is going after Bank of America and JPMorgan Chase like they were a couple of deadbeat student borrowers.” — Kathy Shanley, senior investment grade analyst at Gimme Credit, a corporate bonds research service, on Sallie Mae’s insistence the banks honor their commitments for the dpurchase of the student lender.
    
“The MOU (memorandum of understanding between UK financial regulators) was a Rolls Royce production but when it came off the shelf it turned out to be an old banger,” said John McFall, chair of the British parliament’s Treasury Committee, a cross-party group which is investigating the handling of the crisis at troubled UK lender Northern Rock.

“Of course, like all such deals, this one should undergo all the appropriate scrutiny but I hope that that discussion does not devolve in the kinds of demagogic attacks that could cost Americans jobs and threaten New York’s place as the financial capital of the world.” –New York Mayor Michael Bloomberg on Nasdaq’s deal with Borse Dubai. 

Compiled by Martin Howell

Photo: Reuters File

** Expect a record 2007 on the M&A front, even with credit evaporating and markets volatile. Data from Thomson shows global deal volumes in the third quarter rose 17 percent to $884 billion. Corporates came to the rescue as buyout firms fled. Miner Rio Tinto’s bid for rival Alcan (execs pictured left) and Qatari investment firm Delta Two’s offer for UK retailer Sainsbury, valued by Thomson respectively at $43 billion and $19 billion, helped keep third-quarter M&A on an upward trend, while the volume of assets acquired by buyout firms fell by 66 percent in the quarter.
    
** Weak financial results at audio equipment maker Harman have helped to sour private equity interest in completing the $8 billion buyout of the company, according to the Wall Street Journal, which cited people familiar with the matter. KKR and Goldman Sachs Group’s private equity arm agreed in April to buy Harman. The sources said tough credit conditions were also making the deal hard to complete. 
    
** General Electric has offered 4 billion euros ($5.6 billion) to buy the property assets which Spanish bank Santander is selling to fund its bid for parts of Dutch bank ABN AMRO, according to newspaper reports. A source familiar with the process said bidders had until Friday to make binding offers for some or all of the property and that a deal should be completed within a month. 
    
** New Zealand casino operator Sky City Entertainment said it had been approached over a possible takeover, sending its shares surging to a record high and valuing the company at as much as $1.8 billion. Sky City said it had received an indicative approach from a party it did not name, expressing an interest in acquiring the company at a significant premium to its previous share price. Sky City has a virtual monopoly in casinos in New Zealand because of a ban on any new licenses
       
** Credit may be tight all over Wall Street, but at least employees at Goldman Sachs are enjoying their standard Midas treatment. Bloomberg reports Wall Street’s most profitable securities firm set aside $16.9 billion to pay salaries, benefits and bonuses in the first nine months of the year, topping the record amount for all of last year. 
 
** “Material Adverse Change”, the legalese addendum once given little consideration in deal paperwork has become “more than arcane legal language in a deal agreement”, the WSJ’s Deal Journal writes, noting that while deal lawyers don’t expect buyers to find much relief — they certainly haven’t so far — there are courts that have yet to hear the arguments.

(Photo: Reuters File) 

They’re two of New York’s most influential politicians who have found common cause on Wall Street-related issues in the past despite different party affiliations. But this time New York State’s senior senator and champion campaign fundraiser Chuck Schumer and New York City Mayor and financial information mogul Michael Bloomberg are seeing anything but eye-to-eye.

At issue is Dubai’s plan to buy a 20 percent stake in leading U.S. electronic stock exchange Nasdaq — one of the many moving parts in a deal that will also see Nasdaq take a stake in the oil rich emirate’s stock exchange and accomplish it’s long hoped-for goal of taking control of Nordic stock exchange OMX.

For some, including Schumer, a Democrat, the deal recalls Dubai’s last controversial foray into the U.S., state-owned Dubai Ports World’s bid to acquire key U.S. ports as part of a larger international takeover deal.  

At this early stage this deal gives me pause, Schumer said, urging Treasury Secretary  (and former Goldman Sachs CEO) Henry Paulson to lead a thorough investigation into the deal.  While I am and have been a big proponent of foreign investment in the United States, we must still be careful of the kinds of investments made in our critical infrastructure, financial exchanges, utilities, and other areas that are vital to the operation and security of our country.

Several other Democratic lawmakers called for a careful national security review of the deal and President George W. Bush promised to “take a good look at it as to whether it has any national security implications.”

But Bloomberg, who has been taking an increasingly high national profile and recently changed his party affiliate from Republican to independent, saw only positives from the deal.

Today’s announcement that Nasdaq is partnering with Borse Dubai to acquire the Swedish exchange OMX appears to be good news for both New York and the nation, especially because it gives our City a significant leg-up on our competitors in Europe,” he said in a statement.

And in what could be read as a dig at Schumer — an erstwhile ally on issues like the supposed dangers from excessive corporate regulation to New York’s primacy as a financial center, he continued:  “Of course, like all such deals, this one should undergo all the appropriate scrutiny but I hope that that discussion does not devolve in the kinds of demagogic attacks that could cost Americans jobs and threaten

(Photo: Reuters) 

** Nasdaq and Borse Dubai are teaming up to buy OMX. As part of the deal, Borse Dubai will end up with a 20 percent stake in Nasdaq and Nasdaq will take a strategic stake in Dubai International Financial Exchange, which it said will be rebranded with the Nasdaq name and licensed to use Nasdaq and OMX market technology. Nasdaq will take Borse Dubai’s existing stake in OMX. Borse Dubai will also buy Nasdaq’s 28 percent stake in the London Stock Exchange but will continue with its 230 Swedish crown per share offer for OMX, which values OMX at around $4 billion, while Nasdaq will withdraw its current cash-and-shares bid. ”The combination will create the largest global network of exchanges and exchange customers linked by technology,” said Nasdaq Chief Executive Bob Greifeld. Qatar’s state investment fund, the Qatar Investment Authority, promptly responded by buying a 20 percent stake in the London Stock Exchange and urged OMX shareholders to take no action on the Borse Dubai offer pending a further statement. 
 
** Investment guru Warren Buffett’s Berkshire Hathaway sold $41 million worth of shares in PetroChina on Sept. 6, the fund’s third sale of stock in Asia’s top oil and gas producer announced in two months. Berkshire sold just over 28 million shares at an average price of HK$11.47 apiece, trimming its stake in PetroChina to 8.93 percent from 9.07 percent of the firm’s free-floating shares. Berkshire built up its stake in PetroChina in April 2003 at an average price of about HK$1.60 per share, becoming the second-biggest shareholder in what is now the world’s No. 2 oil firm by market capitalization, after Exxon Mobil.
 
** British bank Barclays’ bid for ABN AMRO, one of two offers for the Dutch bank, is too low to be recommended to shareholders, according to ABN’s chief executive. “We cannot ask shareholders to pay the difference from the consortium’s bid,” Rijkman Groenink told an extraordinary meeting of shareholders called to discuss the offers. Barclays’ part-cash, part-share bid is currently worth about 59 billion euros ($82.52 billion), while a rival, mostly cash bid from a consortium grouping Royal Bank of Scotland, Belgian-Dutch financial group Fortis and Spain’s Santander is worth about 70 billion euros. 
    
** Buyout firms are handling the pressure from the current credit crunch fairly well, but some leveraged buyouts will not get done as a result, according to Carlyle Group co-founder David Rubenstein. Most announced deals waiting for financing will be done on revised terms, he said, although it is too early to tell exactly how the logjam of leveraged buyout debt will play out. “We got a wake up call. A good wake up call. Life isn’t going to be so easy always and I think the industry has responded reasonably well. If we had a wake up call and we were in a recession, we’d be worse off.” This morning, Carlyle agreed to sell a 7.5 percent stake in itself to Abu Dhabi, the latest in a run of Middle Eastern deals.
    
** Mitsubishi UFJ Financial Group, Japan’s biggest bank, said it will buy $1 billion worth of shares from Mitsubishi UFJ Nicos to bolster the credit card unit’s financial health. Japan’s consumer finance industry has suffered heavy losses and restructuring, due to new laws that will lower the maximum interest rate and court rulings that have forced lenders to repay some interest charges to their customers.
    
** German airline Air Berlin said it would buy charter carrier Condor in a two-stage deal that could land travel firm Thomas Cook a near 30 percent stake in Air Berlin. Air Berlin’s fleet is set to become Germany’s second- and Europe’s fifth-biggest airline and give it a similar scale to low-cost rivals Ryanair and easyJet. 
    
** HSBC is not considering acquisitions in Japan and will instead focus on growth by itself as it rolls out retail banking in the world’s second-largest economy, HSBC Chairman Stephen Green said. He added HSBC was “very comfortable” with its holding in Hang Seng Bank, indicating that it might not give in to an activist shareholder’s request that it consider raising its stake in the Hong Kong lender.
    
** Swiss drugmaker Roche Holding once again extended its offer to acquire Ventana Medical Systems, and Ventana swiftly rejected the offer, calling it “grossly inadequate.” Roche extended the offer until Nov. 1. It launched a roughly $3 billion hostile tender offer for Ventana in June. 
    
** The Federal Reserve’s interest rate cut may make it easier for First Data Corp to sell a $5 billion loan for its leveraged buyout — but might not help a bigger backlog of deals that still need financing. “I think the Fed action did give investors a level of comfort that liquidity was likely returning to the system, and it really has been returning,” said John Fenn, a high-yield strategist at Citigroup in New York. Still, he said, “This is not a silver bullet. We’re not going to see all of a sudden $200 billion to $300 billion of paper clear.”
 
** Banks and private-equity firms could be headed for a wave of legal battles, the Wall Street Journal’s Deal Journal blog speculates, citing recent disagreements over the funding some of smaller deals, like Blackstone Group’s $1.7 billion buyout of PHH. “Will Blackstone, for example, stand still if its deal for PHH falls through because J.P. Morgan Chase and Lehman Brothers Holdings balked at financing it?”
 

“It’s the first time in four years that professionals at Providence have had a chance to take a vacation.” — Jonathan Nelson, CEO of Providence Equity Partners, on what the credit crunch has meant to his firm.
    
“It’s kind of like revenge of the nerds.” — Quint Barker, managing principal, New York Life Investment Management, on the return of middle market deals.
 
“I believe the last 5 years were the 5 greatest years we could possibly imagine. It was too good to be true.” — Carlyle Group co-founder David Rubenstein on the golden era of private equity.
 
“I do believe the worst is over.” – Colm Kelleher, Morgan Stanley’s CFO on the credit markets turmoil.

“I think it is totally unacceptable that a representative of the U.S. administration criticizes an independent court of law outside its jurisdiction. The European Commission does not pass judgment on rulings by a U.S. court and we expect the same level of respect.” — EU Competition Commissioner Neelie Kroes on criticism from the United States of a European court ruling this week that Microsoft broke antitrust laws.
    
“The deafening silence is dispiriting for shareholders.” — David Buik at Cantor Index on the lack of news about any buyers for reeling U.K. home mortgage lender Northern Rock. 

Compiled by Martin Howell

David Barry, managing editor at Dow Jones’ Private Equity Analyst publication, couldn’t resist asking Rich Friedman of Goldman Sachs if he planned to go back out on the fund raising trail now that Blackstone has officially raised the largest leveraged buyout fund ever, at $21.7 billion. Goldman’s buyout fund is $20 billion.

Friedman, seated on a panel at a PEA conference in New York City just smiled and shook his head at the question. Later, he said “we’re not opening it (the fund) up for any more capital,” and spoke of focusing on smaller deals now that the credit crunch has taken large leveraged buyouts off the table for now.

Blackstone (whose co-founder Stephen Schwarzman is pictured left) famously closed its buyout fund at $15.6 billion, then reopened when the firm learned that other buyout shops were raising funds of a similar, or larger size. Now that the credit crunch has killed the market for large LBOs, some experts wonder if a large private equity fund makes sense.

But Friedman said that Goldman will work through its fund just fine, focusing on smaller deals such as capital injections, minority stakes and rescue financings.

“It’s too early to say that weve seen the end of larger funds,” he said, adding however, that “you’re not going to see the sequentially larger funds,” that firms have been raising. In the end, it’s all about demand from the institutional investors, Friedman pointed out. 

(Photo: CNN Money)