While traditional initial public offerings on U.S. stock exchanges have floundered, the once-obscure “blank check” arena has only gained traction so far this year, becoming a kind of safe playground for investors, and a retreat for some private equity players finding it tougher to raise debt now that credit terms have tightened.

Four weeks into 2008, 5 IPOs by so-called blank check companies– also called special purpose acquisition companies, or SPACs – have tapped investors for about $4 billion. The latest, activist Nelson Peltz’s Trian Acquisition I Corp, was expected to raise $750 million on Wednesday.

In stark comparison, only one mainstream IPO has managed to stir up enough interest — Williams Pipeline Partners which raised $325 million last week – to actually make it to market, and has disappointed since its debut. 

Blank check companies, which are formed to acquire other businesses and are little more than a shell until an acquisition is made, took off in 2007, accounting for roughly every fourth new U.S. listing, raising nearly $12 billion.

That trend looks set to carry over into this year with about 25 percent of the U.S. IPO pipeline being filled with blank check offerings — 23 out of 89 companies that have filed to sell shares to the public, according to data tracker Dealogic.

“SPACs fill a particular need in the market right now,” Linda Killian, portfolio manager of the IPO Plus Fund, a mutual fund advised by Renaissance Capital, recently told Reuters. “With the U.S. market in turmoil, large pools of money are looking for safer, more reliable terms.”

Killian said blank check IPOs have “little downside” for investors since they must set aside about 90 percent of the funds raised to pay for an acquisition. Investors also get to vote on potential acquisitions, and are promised a return of their investment if no deal materializes in a specific period of time.

On average, blank check companies generated average returns of 2.4 percent in 2007, according to Renaissance Capital’s IPOhome.com, but performance shot up for companies that were near to closing an acquisition — to 18.9 percent.

Killian predicts blank check offerings will continue to be rolled out as long as borrowing costs remain high for other types of deals.

Indeed, as easy debt to finance leveraged buyouts has dried up, private equity bosses have been eyeing the SPAC space as a place to retreat to during this period of inhospitable credit markets.

Edward Mathis, a managing director of private equity firm Carlyle Group, for example, has been involved in a number of blank check deals, including Endeavor Acquisition Corp’s reverse merger with casual wear retailer American Apparel last month.
 

(Image credit. www.americanapparelstore.com)

Sallie Mae CEO Albert Lord, described by colleagues as a “force of nature,” discovered some impressive humility on Wednesday when he spoke to investors on a conference call to explain the company’s fourth quarter loss.

Sallie Mae is still reeling from the decision by a consortium led by private equity firm J.C. Flowers to back out of its agreement to acquire Sallie Mae for $25 billion or $60 a share in cash and Sallie Mae’s shares are now trading under $19, having been as high as $58 in July 2007.

Amid the storm as the deal unraveled, Lord showed his aggressive side. For some investors, it would appear, it was too much. On Wednesday, Lord apologized to investors for his performance at a previous conference call in December — when he punctuated his remarks with a choice curse word — and promised to be more responsive.

“The last 100 days … have been particularly eventful — I would say reasonably painful,” he said. “Certainly my December 18 conference call did not improve that situation. I did not answer your questions that day. We’ll answer them today.”

“I recognize that that day, my closing comments were offensive. They frankly were not meant to be closing comments — for that I apologize,” Lord said. “I can’t say that’s the first time I have used bad language — it’s the first time I did in front of 500 people.”

While Lord displayed some humility, he also showed that he and his company will not be hiding from deal activity. This may alarm some investors.

Some might think Sallie Mae has enough on its plate restoring confidence among investors in the company as it goes forward. However, Lord told investors that the turmoil in the markets may actually present Sallie Mae with some deal opportunities.

“We see major industry consolidation opportunity — frankly I see it quite first hand because I get the calls,” said Lord. “We’d like to capitalize on that opportunity … We are specifically looking for quality asset generation platforms, particularly in the private space.”

“We’ll fund those types of acquisitions, if and when we get to them, with equity. And we will do it — you may find this hard to believe — at non dilutive P/E multiples,” he said.

Hard to believe? Perhaps.
(Reporting by Mark McSherry)
(Photo: Sallie Mae)

Rumors of big deals are bubbling up from Europe. Must be something in the chocolate at Davos. Shares in Dutch telecoms group KPN were moving on talk U.S. rival AT&T Inc was interested in buying the Dutch company. A KPN spokesman declined to comment. At Davos, Britain’s Prudential declined to comment on market rumors that Chinese insurance giant Ping An was set to take a stake, but CEO Mark Tucker said he welcomed long-term investors. Ping An has said it wants to raise $22 billion, stoking speculation about potential acquisitions, including stakes in Pru and rival Aviva.

Danish brewer Carlsberg has put together financing for its joint bid for Scottish and Newcastle. A formal 7.8 billion pound ($15.26 billion) cash bid is now set to be announced, priced at 800 pence per S&N share, aimed at splitting up Britain’s largest and last remaining big independent brewer, said sources close to the deal. The Financial Times reported that the deal was thought to have run into due diligence problems, and there was some concern about the financing of the deal by the Copenhagen-based brewer.

Failed M&A deals hit a record in 2007 Asia Pacific ex-Japan, reaching $69.5 billion from 295 busted deals. Australia accounted for 62.5 percent of the total. Bankers and private equity firms noted that the boom in the overall number of deals made it more likely that failed bids would also rise. The biggest withdrawn deal in 2007 was an $11 billion buyout group’s bid for Australia’s Qantas Airways.

Shares of struggling electronics retailer Circuit City Stores Inc. surged 21 percent on Tuesday on news that Hollywood Entertainment Corp founder Mark Wattles acquired a 6.5 percent stake.

Wattles acquired the stake in Circuit City for investment purposes and may buy additional shares, encourage the company to enter a merger, or nominate candidates for the board, according to a filing with the U.S. Securities and Exchange Commission.

The interest in Circuit City, which suffered from lower sales in December — the peak season for most retailers — comes after Wattles filed for a “blank check IPO” in December. The blank check company filed to raise up to $200 million “to focus on potential acquisition targets in the consumer products and retail industry,” the filing said.

Wattles sold Hollywood Entertainment to Movie Gallery in 2005 and owns 32 stores of the Ultimate Electronics Stores chain. Movie Gallery, the second-largest U.S. video rental chain, filed for Chapter 11 bankruptcy in October. In December, Wattles was listed as a potential investor in a reorganization plan for Movie Gallery, according to media reports.

Maybe Wattles’ attention has now shifted to Circuit City? Wattles and his affiliated companies acquired 11 million shares of Circuit City, according to the SEC filing. Wattles met with Circuit City management before acquiring the stock, the filing said.

Circuit City said December same-store sales — or sales at established stores — dropped 11.4 percent. That compared with a 1.5 percent rise in same-store sales at rival Best Buy.

Circuit City’s weak December sales, expected fourth-quarter loss and weak stock price prompted some analysts to label the retailer as a likely takeover target. Wattles’ SEC filing just added a bit to those hopes.

Earlier this month, Classic Fund Management Aktiengesellschaft, a Liechtenstein-based asset management company, disclosed it holds a 5.7 percent passive stake in Circuit City.

Circuit City could not be immediately reached for comment.

(Photo: Reuters/Steve Marcus)

Roche appears to have been between a rock and a hard place on Ventana. After looking through Ventana’s books, it decided it could stomach a higher bid and agreed to a $3.4 billion deal - raising its offer to $89.50 per share from $75. Ventana had resisted Roche’s initial offer, but analysts, admitting it was a good strategic fit, said the deal was expensive and at a significant premium to other, recent deals. Investors may have thought so as well, selling Roche down around 2 percent by midday. That’s significant, given the overall Swiss market is up on a day when global markets are tumbling.

China’s state-backed miners have looked at Xstrata but are unlikely to bid for it, leaving Brazil’s Vale or Anglo-American best placed to snap up the Anglo-Swiss miner. Vale, which produces a fifth of the world’s iron ore, said on Monday that it was in talks with Xstrata about a takeover, a deal that analysts said could top $100 billion.

Israel’s Teva Pharmaceutical Industries plans to acquire privately held biopharmaceutical company CoGenesys Inc for $400 million in cash. Teva said the deal, to be funded from its internal resources and expected to close during the first half of 2008, would help its position in the biogenerics market. CoGenesys was spun out of Human Genome Sciences in June 2006.

Private equity has moved from the “golden age” of record-sized buyouts to the “purgatory age,” when firms need to atone for their so-called sins of success, Carlyle Group co-founder David Rubenstein joked on Friday at the Warton Private Equity and Venture Capital Conference.

After a protest by the Service Employees International Union briefly delayed Rubenstein’s speech, he said “The golden age is over. We’re now in the purgatory age.” The SEIU labor group was protesting Carylyle’s recent acquistion of nursing home operator Manor Care , saying the buyout firm’s pressure for greater profits would worsen care for senior citizens and conditions for employees.

“P/E firms will spend more time explaining what we do to create value. No body ever asked me in the past what jobs we created or what factories we opened…or why P/E firms make companies more efficient and what we do to create value beyond the rate of return,” Rubenstein said.

The private equity industry will have to address the concerns of labor unions, Congress and the media more than in the past as greater attention gets focused on how buyout firms conduct business, he said.

Although tight credit markets have made mega-deals difficult to finance, Rubenstein said the industry will see more smaller deals and non-leveraged deals in which buyout firms take minority stakes in companies. Private equity will also invest more internationally. But buyout firms shouldn’t take a bleak view on the current market tensions since times of economical turmoil often create the greatest opportunities for deals, he said.

“After the purgatory age, we’ll see the platinum age,” Rubenstein said. “The problems with financing and the problems explaining what we’re doing will go away…private equity is better than anything you can legally do with your money.”

Rubenstein, who in December bought a rare, 710-year-old copy of the Magna Carta for $21.3 million, urged conference attendees to be more involved in community service and philanthropy. The historical document, the last remaining copy in the United States, will remain on permanent display at the National Archives and Records Administration, Rubenstein said.

“Always think of meaning for society and the community in which you live and give back to that community, as well as your families,” Rubenstein said.

Maybe that’s the way out of purgatory?

(Photo: Reuters/Fred Prouser)

If you were wondering how big a year it was for buyout shops, here’s your answer: partners at mega-funds were paid an average of $2.7 million this year. That’s up 8 percent from the prior year, according to a report by recruitment company Glocap and Thomson Financial.

But before anyone calls them overpaid, take a look at the numbers below. Relative to increases for their junior colleagues, that was a modest raise for PE partners.  

For mega-funds, or those with over $5 billion in assets, below is the total average compensation by title for 2007 (with increases over 2006), according to the report: 

(Image: Blackstone CEO Stephen Schwarzman in 2007. Reuters file)
    

Responsible for billions in write-downs from sub-prime, commerical and other mortgage-backed securities, real estate bankers kicked off the New Year a bit nervous around the office. This week UBS showed why.

CEO Marcel Rohner issued an internal memo on a massive restructuring at the Swiss giant — aimed squarely at reining in real estate activities.

Here’s what Rohner said:

On Real Estate and Securitization:

“We have already improved efficiency and expect a total headcount reduction of close to 50% from the peak of last August. We will reduce balance sheet utilization by two-thirds, strengthen risk discipline by creating a dedicated risk management position, and enable our staff to focus on building a leading client-driven franchise for 2008.”

On MBS/ABS Sales and Trading:

“We have already scaled back our origination activities, including the closure of UBS Home Finance, as we believe this market does not offer profitable new issue opportunities at this time.”

On the Real Estate Workout Group:

“In order to ensure robust risk management of our legacy positions, we will be segregating our existing illiquid MBS, ABS and CDO portfolios into a newly-created workout group…Our aim is to reduce exposure to this asset class in an orderly manner while minimizing further downside risk.”

On Real Estate Finance:

“The REF group will focus on providing commercial real estate finance with the intention of distributing our risk via the securitization or loan syndication markets.”

(Image: Marcel Rohner of UBS  at a news conference in Zurich in 2006. Reuters file)

Is Merrill Lynch a target of European giant UniCredit? Don’t bank on it. UniCredit has “categorically” denied a report in Italy’s leading business daily that it might be interested in buying the world’s biggest brokerage. The report said UniCredit CEO Alessandro Profumo could see this as the right time for a deal, given the weak dollar and falls in Merrill Lynch’s share price. Investors and analysts were skeptical, with one London analyst saying, “It does sound crazy.” Merrill on Thursday reported the biggest quarterly loss in its history and has launched a $6.6 billion offering of preferred shares to an international consortium that includes Japanese and Kuwaiti investors.

Private equity colossus Blackstone is getting into the food business. Performance Foods Group Co said it agreed to be acquired by Blackstone Group and Wellspring Capital Management for about $1.3 billion in cash. The agreement includes a $40 million stipulation — that’s the price Blackstone and Wellspring will have to pay if they fail to consummate the deal. Blackstone, which went public in June, has $98 billion of assets under management, according to its Web site.

Facing a “put up or shut up” deadline, mining titan BHP Billiton Ltd/Plc may be readying a sweetened offer for rival Rio Tinto Ltd/Plc. Speculation swirled on Friday that BHP will lift its offer to 3.58 of its shares, plus A$16.50 for Rio. The talk lit a fire under Rio’s shares, sending the stock up 4.6 percent in Australian trading. BHP has until Feb 6 to make a formal offer for Rio, or walk away under a deadline imposed by the UK Takeover Panel. Neither BHP nor Rio would comment.

The Private Equity Council, the trade group created by the leveraged buyout industry when its public image was taking a bruising, came out recently with a report on job creation and the LBO industry. The report doesn’t shed much light, though.

The PEC and the academics who assembled the report obviously worked hard on it–and they point out the truism that in fact, in certain cases, PE firms create jobs. But the study took only a tiny slice of the market (42 companies bought by private equity firms). In addition, it didn’t name the individual portfolio companies at the request of the private equity firms that control them. 

“They simply wanted to produce company data on an anonymous basis,” PEC spokesman Robert Stewart said, citing “competitive issues.”

Nevertheless, here are some of its findings:
    Among the 42 companies, 32 or 76.2 percent expanded their
workforces in subsequent years while the remaining 10 cut their workforces. 
    Across all 42 companies, 26,214 net new jobs were created, or an increase of 8.4 percent over their combined employment of 310,420 at the time of acquisition. 
     
Data was provided by Apollo, Bain, Blackstone, Carlyle, Kohlberg Kravis Roberts, Providence, Silver Lake, and Texas Pacific Group.
 
But without more information on how big a slice of the corporate universe controlled by private equity the surveyed companies represent, and why these particular companies were chosen for the survey and not others,  the report seems to raise as many questions about job creation as it answers.

(Image. PEC’s Doug Lowenstein)