Could the battle for Restoration Hardware become another situation like EGL, Inc? If so, Restoration CEO Gary Friedman may be upset at the prospect of a rival bidder, but it sure does help when that rival is willing to pay more.
 
Restoration agreed to be bought on Nov. 8 by a group including Friedman and private equity firm Catterton Partners. The management buyout was valued at $6.70 per share, or around $267 million.
 
Any buyouts that involve management often come under scrutiny, because after all, the deal involves an insider any way you slice it. Despite management’s supposed independence from the special committee deciding whether to do such a deal, the committee is intimately close with that manager(s). The likelihood of them getting the green light is pretty high. 
 
On the flip side, an outsider arriving at a management buyout deal is probably not going to get as a warm a reception, for obvious reasons. In the Restoration Hardware deal, Sears is that other party. Not surprisingly, it looks as if the special committee has hardly rolled out the red carpet for them.
 
Sears, the retailer controlled by hedge fund guru Eddie Lampert, offered $6.75 per share for Restoration Hardware on Monday. Sears complains that Restoration is not offering any peaks into its books, despite a go shop period in place following the management-Catterton deal. 

Will Restoration open its books to Sears? That remains to be seen.
 
If you’re wondering how this will all end up, take a look at what happened with trucking company EGL, Inc. And keep in mind that Sears’ buying power is a lot stronger right now than a private equity firm, which is limited in its borrowing levels thanks to the credit crunch. 
 
In the case of EGL, Inc., a buyout group led by its CEO and Founder, James Crane, looked ready to seal a deal for the company earlier this year. Crane’s private equity partner was Centerbridge, which replaced General Atlantic after that firm got cold feet. 
 
The deal looked good until Apollo Management not only offered a higher bid, but complained about being shut out of deal discussions. After some back and forth, Apollo handed over the highest price and won the deal. Money talks.
 
One thing to keep in mind in these situations is the “manager” or “managers” involved. Even though Friedman could end up losing the deal to another party, a bidding war raises the takeout price.
 
So if you’re him, which do you prefer? Being part of the company’s “go private” transaction, or seeing your stake in the company go up a few million bucks. Reuters data show that Friedman owns 2.6 million shares as of Nov. 8, or more than 6 percent of the company.
 
Sure, he’d probably like to stay with the company. But watching your shares go up in price isn’t a bad consolation prize.
 
In the case of EGL’s Crane, his original buyout offer was $36 per share. Apollo’s winning bid was $47.50 per share. It stinks to lose, but making millions in the process probably softens the blow. 

So let’s say you’re a private equity person, and you’re in the Middle East looking to strike a deal with a sovereign wealth fund. The call to prayer sounds out over loudspeakers. What do you do? Or say you’re at a dinner meeting with executives at a Japanese conglomerate about a potential deal. What are the do’s and dont’s of chop stick handling, or better yet, of dining in general? As Jerry Seinfeld once asked, “what’s the etiquette?”

The Investment Dealers’ Digest tackles this very subject – a timely one given the amount of M&A activity happening in places like Dubai and Beijing.

The growth in international M&A does indeed raise the importance of eradicating “Dumb Americanism” in places where customs and etiquette are important. We’ve all seen the boisterous American dude at a bar or restaurant abroad, embarrassing the Stars & Stripes with shouts and back slaps.

IDD points to scenarios where even a poke of the chop sticks in Tokyo can send the wrong message.

And by the way, the proper thing to do when the call to prayer sounds on the walk back to your hotel: “Stand still. Take a pause,” according to a person quoted in the article.

(Photo. Reuters file)

** A group led by Richard Branson’s Virgin Group was selected as the preferred bidder to rescue UK’s Northern Rock Plc and plans to repay $22.6 billion to the Bank of England. U.S. finance company GMAC had been eyeing Northern Rock with the aim of combining it with its troubled mortgage lending arm Residential capital LLC, sources told Reuters last week. Now, GMAC has to find a new plan.

** Rio Tinto is scrambling to fend off an unwanted $120 billion takeover from mining rival BHP Billiton Ltd. Rio Tinto, strident that it is better as a standalone firm, said it would spend $2.4 billion on new mines, raise its dividend, and raise billion of dollars from asset sales.

** Sears Holdings said it offered $6.75 per share for Restoration Hardware. The specialty store, which already agreed to be acquired by Catterton Partners for $6.70 a share, refused to enter into a confidentiality agreement Sears said in an SEC filing.

** JPMorgan became the latest casualty in the subprime credit fallout. The firm plans to cut about 100 subprime mortgage jobs in California, according to a filing with a California labor agency.

** British Airways will not exercise its option to increase its stake in Spain’s Iberia it said on Monday, possibly ending its 3.4 billion euro ($5.05 billion) pursuit for the airline with private equity group TPG.

** Dubai International Capital, a private equity company owned by the ruler of Dubai, said it has made a “substantial investment” in Sony Corp, boosting the shares of the Japanese electronics and entertainment firm.

It is not just the public shopping for bargains on Black Friday. The subprime crisis has created some unusual buying opportunities for investors.
 
British mortgage lender Northern Rock, on the hook for more than 20 billion pounds to the Bank of England, is one takeover casualty, drawing interest from investors ranging from buyout giant Cerberus to distressed investor Wilbur Ross.
 
E*Trade, the online broker which has been battered after an analyst raised bankruptcy fears, seems to be another.
 
Today, CNBC said the troubled broker was believed to be in merger talks with rivals Charles Schwab Corp and TD Ameritrade Holding Corp. E*Trade, which has lost about 80 percent of its value this year, shot up 23 percent on Friday as investors hoped for a takeover.  Still, that only values the company — valued around $10 billion earlier in the year — at around $2.2 billion.
 
But unlike bargains on the shelves on Black Friday, its just a little bit riskier to punt on a bank hit by the meltdown.

**The three big banks cobbling together a $75 billion fund to help struggling structured investment vehicles (SIVs) will begin asking their industry cohorts to help, according to The Wall Street Journal.

SIVs have been hurt as the value of their assets — mainly bank debt and asset-backed securities — dropped amid the U.S. mortgage crisis and the evaporation of short-term funding. The super fund will create potential buyers for SIV assets.

BlackRock Inc. has been asked to be the lead asset manager for the $75 billion to $100 billion fund. Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co. have created a structure for the fund, but it isn’t clear how other financial institutions will respond, the WSJ said.

**Struggling British bank Northern Rock denied a newspaper report on Friday of a “massive hole” in its assets and said it had more than enough assets to cover its borrowings from the Bank of England.

The Guardian newspaper said earlier that about 53 billion pounds ($110 billion) of Northern Rock’s mortgages were owned by a separate Jersey-based company called Granite and that this called into question government claims that taxpayers’ money was safe.

Northern Rock was forced to go to the Bank of England for emergency loans two months ago, as the global squeeze on credit demolished its funding strategy, prompting the first run on a British bank for over 140 years.

“Northern Rock’s Granite programme is well defined and very similar to other UK issuers of securitisation. The market is very familiar with Northern Rock’s Granite programme — monthly investment reports are published,” a Northern Rock spokesman said.

**British Airways and private equity firm TPG will decide over the weekend whether to proceed with their 3.4 billion euro ($5.07 billion) bid for Iberia, a source familiar with the talks told Reuters.

BA must decide whether to invest in further stakes in Iberia or let lender Caja Madrid buy the shares, likely complicating its bid to buy Spain’s biggest airline.

While any potential acquisition of EchoStar Communications Corp. by AT&T Inc. makes little financial or strategic sense, there’s not necessarily any harm in a deal either, JPMorgan analysts said.

Some media reports have said EchoStar rejected an offer of $55 per share from AT&T at the beginning of the year, but that AT&T could be preparing a new offer of $65 per share. Yet, JPMorgan analysts said they believed the “time for a deal has passed.”

“The strategic rationale for a deal has receded and the economic slowdown seems to be taking its toll on DISH,” JPMorgan analysts said in a research report. (DISH is EchoStar’s stock symbol). “As such, we would be surprised if T’s (AT&T) appetite for a deal and what they are willing to pay has increased.”

Still, a deal wouldn’t necessarily hurt AT&T, analysts said. An all-cash deal would modestly hurt earnings in year one and boost earnings after that. An all-stock deal would hurt AT&T’s earnings by 5 percent in the first year, with dilution shrinking over time, JP Morgan said.

“The basis for a deal could be as simple as: they may decide at some point in the future that DISH is strategic; a change of (White House) admin may make deals more difficult for the next four years; there is no impact to T’s financials … so why not buy it, just in case?” JPMorgan said.

With AT&T’s new Chairman Randall Stephenson in charge, though, JPMorgan said that kind “why not?” rationale seems unlikely.

In a subdued day for merger news ahead of the U.S. Thanksgiving Day holiday, weak credit conditions and scrutiny of buyout firms dominated the headlines.

** Blackrock, the asset manager 49-percent owned by Merrill Lynch, is set to manage a $75 billion fund being put together by U.S. banks to help struggling structured investment vehicles (SIVs), according to a report in the Financial Times.

** Britain’s private equity industry will face more scrutiny next month in front of the House of Commons Treasury Select Committee. On Dec. 11, the committee will listen to the views of David Walker, former Chairman of Morgan Stanley International and author of an industry-commissioned report aimed at making private equity firms more transparent.

** British bank Northern Rock has received more rescue proposals, but warned that one proposal was well below Tuesday’s closing price, sparking a new slide in its shares on Wednesday. Northern Rock was forced to go to the Bank of England for emergency loans two months ago, as the global squeeze on credit caused its funding strategy to collapse. That prompted the first run on a British bank since the 19th century.

** U.S. investment fund Lone Star put Japanese hotel operator Solare Hotels and Resorts Co Ltd. on the block in a deal that could raise more than $1.4 billion, sources familiar with the situation told Reuters. Lone Star hired real estate services firm Jones Lang LaSalle to handle the sale process. Blackstone is believed to be among several parties interested in Solare, the sources said.

  The original intent of the reverse break up fee, or at least one of   the intents, was to incentivize buyers to stick with the deal.  Break up fees go to the buyer if the seller decides to go with another option. Reverse fees go to the seller if the buyer gets cold feet.

But private equity firms eventually came to interpret the reverse break up fee as an escape hatch, particularly if the fee is not all that big.

Rather than work in the company’s favor in terms of pushing buyers to complete the takeover — all the while, the fee being in the back of their minds — it’s worked against the company in certain cases.

“What am I missing? This is an option” to back out, one private equity investor told Reuters, referring to when he first came upon reverse break up fee clauses.

When the lawyers inserted such a fee in the the Sallie Mae/J.C. Flowers group deal, they probably thought it was straight forward enough. Now the two sides are battling in court over the fee and other terms of the deal. 

With Cerberus and United Rentals, the reverse break up fee is also in dispute. Cerberus believes that its merger agreement allowed it to walk away and pay a $100 million fee if the firm did not want to go ahead with the deal. United Rentals and its advisers say that Cerberus does not have the right to end the deal, and has sued the firm to complete the existing $34.50 per share offer.

All this leads us, and Breakingviews to believe that maybe its time to just get rid of the break up fee, and instead clarify language on what the buyers are, and aren’t, entitled to do during while trying to close the deal.

Breakingviews argues that if the break up fee clause wasn’t in the merger agreement, Cerberus would have to complete the offer as is.

Restoration Hardware is on Eddie Lampert’s shopping list this holiday season.

Sears Holdings Corp., the retailer controlled by the hedge fund manager, acquired a 13.7-percent stake in Restoration Hardware Inc., which analysts said could signal a new acquisition phase for Sears.

That could set it on a collision course with a buyout group that sealed a a deal recently to purchase the company.

Earlier this month, specialty retailer Restoration Hardware agreed to a management-led buyout with Catterton Partners. Restoration Hardware, which had rejected an initial overture from Sears in October, had 35 days to solicit better offers.  Sears’ purchase of Restoration was disclosed in a filing on Monday.

In an email to employees that Restoration Hardware Chairman Gary Friedman signed “Carpe Diem,” the specialty retailer confirmed that Sears signed a confidentiality agreement to review the boutique retailer’s books and evaluate the possibilty of making a rival takeover bid.

Sears acquired the stake after the Catterton buyout announcement, “indicating a more agressive approach,” Credit Suisse said.

“It is that ‘make a deal’ potential that continues to support the stock as results continue to deteriorate. Ahead of what should be an ugly Q3 report next week, perhpas we are entering the next phase of the Sears Holdings story,” Credit Suisse analysts said.

Restoration Hardware hawks sheets, furniture and gifts to affluent, well educated 35 to 60 year old customers, according to its SEC filings. That might be an odd fit for the more populist Sears. But Credit Suisse analysts said Sears might be trying to fill its home goods void once its partnership with Martha Stewart ends.

** Goldman Sachs put out a doozie of a research report late on Monday that said the 4 percent drop in home prices was just the beginning, and declines may have another 13 percent to 14 percent to go. While the report focused on the implications for financial markets and consumer credit, Goldman also said that any uptick in the mergers for the financial sector may be another 12-18 months away.

“Despite attractive valuations, we do not believe a broad wave of industry consolidation will occur in the financial sector for another 12-18 months,” Goldman analysts said. “Credit risk, balance sheet deterioration, and business model risk continue to outweigh low valuations and funding synergy benefits.”

** U.S. buyout firm JC Flowers submitted an offer for Northern Rock, according to a person familiar with the situation, as shares in the British bank tumbled on fears that any offers will be low. The overture from JC Flowers, which has been trying to end its $25 billion pact for student lender Sallie Mae, includes an offer to Northern Rock shareholders at a “nominal value”, the person told Reuters.

** Mining group BHP Billiton Ltd. continues to press its case for a massive acquisition of rival Rio Tinto despite opposition from several investors. Rio Tinto, meanwhile, may counter by offering joint ventures with BHP as an alternative to a deal, Britain’s Daily Telegraph newspaper said.

** UK-based buyout firm Candover Investments said it agreed to sell Norwegian cable television company GET for 5.8 billion crowns ($1.05 billion) to a group of buyers led by rivals Quadrangle and GS Capital Partners, Goldman Sachs’ private equity arm.

** Investment Corporation of Dubai, an agency which pools some of the Dubai government’s biggest holdings, said it is looking to benefit from the U.S. mortgage crisis to buy into troubled U.S. financial services companies. Mohammed Shaibani, chief executive officer of the Investment Corporation, told reporters that Merrill and Citi shares are still too expensive, however.

(Photo, Reuters file)