Jon Moulton may work for the British buyout firm named Alchemy Partners, but it is his private equity rivals, and their bankers, whom he accuses of the dark art of seeking to transform base metals into gold.

He told the industry’s annual Super Return conference on Tuesday that buyouts last year weren’t done on the basis of a company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) for the past 12 months “they were done on a mythical number which nearly always turned out to be 20-30 percent higher than reality.”

“People talked about a deal having eight times EBITDA/debt and they forgot the word “adjusted” or “modified”,” Alchemy’s managing partner Moulton told delegates. “There was no proper checking. They were false numbers.”

The industry, and the banks that helped fuel last year’s record buyout boom, can now only dream of multi-billion dollar deals.

“Financing a large leveraged buyout at the moment is an exercise in mental masturbation,” said Moulton, who can always be relied on for a memorable quote on an industry that typically shuns publicity.

He spared nobody in a devastating assessment of the outlook for private equity, drawing a parallel between the debt bubble of the recent buyout spree and the way the subprime crisis has caused damage way beyond the U.S. housing market.

Banks were responsible for lending on the basis of “weaker and weaker documents”, contributing to the U.S. subprime crisis and over-investing in complex derivatives without enough research.

“Banks are in trouble themselves, they bought piles of this rubbish too – CLOs (Collatorised Loan Obligation), CDOs (Collaterised Debt Obligation), derivatives, CDSs (Credit Default Swap) of every kind, most of which their senior management didn’t understand either,” Moulton said.

He also lambasted the industry’s efforts to improve its image, saying the large firms had done “a lot of spinning stories to justify the wealth and low taxes and avoid blame for the excesses.”

The PR people they hired to help polish their image? Some of Jon’s “least favorite people.”

He was similarly unimpressed by the British Private Equity and Venture Capitalist Association’s efforts to increase transparency with last year’s so-called Walker report.

“Now we’ve added Walker - the joy of the new pedestrian culture for the private equity world. In a short summary the results were pretty much as expected, they will have no practical effect but they will only cost a little to do so I think the outcome was really quite favourable with the industry. It will be fascinating to see if I ever meet anyone who has read it.”

(Reporting by Eleanor Wason)
(Illustration: Will Green)

Liberty Media Corp’s acquisition of News Corp’s stake in DirecTV Group Inc cleared a major hurdle, getting conditional approval from U.S. communications regulators. The Federal Communications Commission said it concluded that “as conditioned, the public interest benefits of the (deal) outweighed the potential harms.” Liberty and DirecTV, the top U.S. satellite television provider, have to continue to abide by program access and other requirements the agency previously imposed on News Corp to preserve competition and Liberty has to “sever” the common ownership of Liberty cable systems in Puerto Rico and DirecTV operations there within one year.

South Korea’s National Pension Service, which manages more than $200 billion, is looking to buy shares in top U.S. financial services firms in the wake of the subprime meltdown, according to a source close to the fund. The world’s fifth-largest pension fund by assets may use a foreign asset manager to target companies and invest in them on its behalf. “As a way of expanding private equity investment in foreign assets, they are looking at U.S. financial services companies,” the source said. “Possible investments would be made in an indirect way.” The names of U.S. companies and investment size have not be released yet.

Chinese aluminum giant Chinalco, which led a $14 billion stake investment in global miner Rio Tinto, has not increased its Rio holding despite an agreement with its U.S. partner that allows them to buy more, according to people familiar with the situation. The wait-and-see stance of state-run Chinalco, which teamed up with Alcoa Inc to buy 12 percent of Rio’s London-listed shares, indicates it is not rushing to enter a bidding war against BHP Billiton, which has made an all-share offer for Rio that is now worth $121 billion. Under terms of a Jan. 30 memo filed with regulators by Rio, Chinalco and Alcoa agreed to buy as much as 14.9 percent of Rio Tinto’s London shares within a month, leaving room for them to increase their stake from the initial 12 percent. Although Chinalco has said it was content to stick at 12 percent, that statement came just before BHP launched its offer for Rio — and Chinalco had reserved the right to counterbid.

Executives from the “Super Return” conference in Munich say the credit meltdown will get worse before it gets better for the private equity business. “I think we are seeing a meltdown in the credit markets that has some life in terms of the downside left to it,” said Scott Sperling, co-president of Boston-based private equity firm Thomas H. Lee Partners, referring to credit market turmoil triggered last summer by problems in U.S. subprime mortgages. Sperling said it could take months for banks to clear billions of dollars of debt left by the credit crisis, which also put a halt to large leverage buyout deals. Steven Puccinelli, head of European Private Equity at Investcorp said deals over the next 12 to 18 months would be hard to come by, but buyout firms were keeping busy tending to their portfolio companies.

Word that Clear Channel settled a dispute with Providence Equity Partners over a $1 billion sale of TV stations was a bit of good news for shareholders — until they heard that Wachovia, a lender on the deal, filed in North Carolina to get out of its financing commitment.

The lawsuit, available here, could put Clear Channel’s TV deal in the recycle bin with the likes of PHH and Reddy Ice, whose deals fell victim to financing concerns from banks rocked by write-downs in leveraged loans and other securities.

That’s bad news for Clear Channel shareholders. And given how bumpy a ride it’s been waiting for the company’s $20 billion LBO by Thomas H. Lee Partners and Bain Capital to close, they could have used the break.

(Image: Clear Channel executives Lowry Mays, Mark Mays and Randall Mays)

U.S. video game giant Electronic Arts offered $1.9 billion for Take-Two Interactive Software, but the publisher of “Grand Theft Auto” is saying no dice. It said the 50 percent premium to its Friday close was cheap, and accused EA of trying to scoop up a company in turnaround with an “inadequate” bid just before the publication of its next hit. The move escalates EA’s battle with Activision for the title of biggest video game maker. Last November, Activision acquired the gaming unit of French media and telecoms giant Vivendi for $18 billion, challenging EA’s long-standing industry dominance. EA publishes blockbuster games “Madden” and “Need for Speed” and would become the largest sports game maker by far if it buys Take Two, which makes the 2k sports games.

A busy night on the IPO front. Visa Inc filed to raise up to $17 billion, which could make it the largest initial public offering ever. San Francisco-based Visa plans to list its shares on the New York Stock Exchange under the symbol “V”. It plans to sell 406 million Class A shares for between $37 and $42 a share. Saudi Arabian Mining Co (Maaden), a state-owned partner in an aluminum venture with Canada’s Alcan Inc, said it planned to raise as much as 9 billion riyals ($2.4 billion) in a share sale this year. Alcan and Maaden agreed in April to develop what would be one of the world’s largest aluminum-making projects at a cost of $7 billion. And China Railway Construction Corp launched a larger-than-expected $5.4 billion IPO that would be the world’s biggest this year, despite cutting the number of shares to be listed in Shanghai amid market weakness. The price range was set at a discount to its main rival, China Railway Group, to attract buyers.

Private equity has also perked up at the start of the week. Digital media company Getty Images said Hellman & Friedman LLC was buying it in a deal worth about $2.4 billion, including debt. Getty stockholders are to get $34 in cash for each share, which it said works out to a premium of about 55 percent over the closing price on Jan. 18, the last trading day before Getty announced it was exploring strategic alternatives. Getty’s board has backed the buyout, which it expects to close in the second quarter of 2008. Investors cheered the news, sending Getty’s share price up 35 percent to $33 in trading before the opening bell.

Dresdner Bank said it would support a rescue package for U.S. bond insurer Ambac. Dresdner is one of several banks working on a deal that could shore up Ambac’s balance sheet and preserve its top credit rating, thus avoiding a credit rating downgrade that could force investors to sell billions of dollars of securities. A rescue package for Ambac is expected to be announced today or tomorrow, and prospects for such a deal supported global financial markets.

Strategic mergers could pick up again in the second half of this year, but leveraged buyouts might stay in the doldrums until 2009, according to Merrill Lynch President and Chief Operating Officer Greg Fleming. Fleming told Reuters that conditions in the credit markets have been as tough as he can remember but that things could improve in the next six-to-nine months. Announced global M&A volume is down roughly 25 percent year to date and buy-out volume is down roughly 53 percent, according to data provider Dealogic. “The dialogue exceeds the pipeline today (for deals), but there is hope that as and when the credit markets get better, M&A will pick up reasonably quickly,” said Fleming. “Stock as acquisition currency, for well positioned companies, is back, and you may see more hostile activity,” he said. Private equity deals were likely to be slow through 2008, and he added: “A pick-up in financial sponsor deals is a 2009 event — we have to work through so much inventory.” Fleming also hinted that Merrill Lynch was not planning dramatic job cuts amid the widespread credit crunch.

Chinese aluminium giant Chinalco, which this year led a $14 billion acquisition of 12 percent of Rio Tinto, said in remarks in an influential magazine that it will continue to seek acquisitions abroad. But Chinalco President Xiao Yaqing left the company’s options open regarding its next move on Rio Tinto, the world’s second-biggest mining company, saying it would depend on circumstances. Market speculation has swirled over whether Chinalco — aided by the government or otherwise — might enter into a bidding war against BHP Billiton for Rio. “Rio is our groundbreaking deal in top-tier overseas mergers and acquisitions, but it will not be the last one,” he said.

Buyout firm Terra Firma and French utility Suez are in talks to trump an agreed 1.2 billion pound ($2.4 billion) bid for British waste firm Biffa, according to a person close to the matter. The source said talks were quite advanced but declined to give further details. The Daily Telegraph, without naming its sources, said a joint bid from Terra Firma and Suez could be pitched as high as 380-390 pence a share. Only two weeks ago, Biffa agreed a 350-pence-a-share bid from private equity groups Montagu Funds, General Electric’s Global Infrastructure Partners and UCIL.

Daily Variety, the venerable show business “trade” magazine and Hollywood fixture for over 70 years, has been put up for sale as part of a cost-cutting plan by its parent company, Reed-Elsevier. The Anglo-Dutch company said it would spin off Variety as part of a planned sale of its Reed Business Information publishing unit, which also includes such titles as Publishers Weekly, Broadcasting and Cable and Multichannel News. While Variety is by far the best known brand in Reed’s RBI division, which publishes some 80 U.S. titles alone, company executives indicated they would prefer to sell the unit as a whole, though they did not rule out a separate bid for Variety.

Corrects to remove reference to 47 pounds per share, which was published in a Brazilian newspaper and not confirmed by the source.

Brazilian mining group Vale has raised its offer for Xstrata to 47 pounds per share, according to a source close to the talks. Analysts have said the takeover could cost more than $100 billion and would be the biggest acquisition ever by a Brazilian company. Bickering about prices has held up the deal so far, sources say. One key problem has been the movements in the shares of the two firms since Vale said on Jan. 21 that it was in talks about a possible takeover of Xstrata. Vale would pay for more than half of the value of the deal with its stock, one source said. Glencore, which holds more than a third of Xstrata, is said to be looking for 45 to 48 pounds.

Anglo-Dutch publisher Reed Elsevier said it would buy U.S. risk-management business ChoicePoint for $3.5 billion to boost its LexisNexis risk-information and its Analytics. It said the deal has the unanimous backing of Choicepoint’s board. Reed also said it would sell its Reed Business Information (RBI) arm to reduce its exposure to cyclical advertising markets. Advertising accounts for around 60 percent of revenues at RBI, which itself generates around 20 percent of Reed’s 4.6 billion pound group revenues. Numis Securities said the ChoicePoint deal, at 4.2 times revenues and 14 times underlying earnings, was fully priced, and said the division could fetch around 1 billion pounds.

U.S. semiconductor inspection specialist KLA-Tencor Corp offered $467 million for Belgian peer ICOS Vision Systems. The companies said in a joint statement that KLA-Tencor was offering a 35 percent premium over the Belgian company’s average closing price over the past 90 days. KLA-Tencor will need to woo a large number of individual shareholders rather than a group of key investors.

Aberdeen Asset Management said it sold part of its stake in miner Rio Tinto to Chinalco and Alcoa in their surprise deal announced Feb. 1 and is considering cutting holdings further. Hugh Young, the high-profile managing director of Aberdeen Asset Management Asia, did not provide details of the sale but a Feb. 4 regulatory filing showed that Aberdeen sold 1.5 million shares at 60 pounds each, about 12 percent of its previous holding of 12.8 million shares. Young said the UK fund firm’s portfolio managers were reviewing what to do with their remaining Rio stake after having held the stock for more than a decade. “It’s been a great stock for us, really well managed. I guess brutally it comes down to price for everything,” Young said.

MySpace, the top social networking site owned by News Corp, is in talks to create an online music joint venture with the four biggest record companies, according to sources familiar with the discussions. The talks are part of Rupert Murdoch’s plans to distinguish MySpace, born as a haven for new music fans, from fast-moving rival Facebook as the premiere destination for digital media. Plans for the service, tentatively named MySpace Music, are still in the discussion phase. One source said MySpace has held talks with companies over the past few weeks to gauge interest in such a service, which would compete with Apple Inc’s popular iTunes.

Private equity firm Sun Capital, fresh from its purchase of clothing maker Kellwood, said in a SEC filing it has offered to buy Furniture Brands International “for a substantial premium” to the $10.18 closing share price of Feb. 19. At that price, the company is worth about $500 million. Furniture Brands International reported a loss in the fourth quarter on falling sales and charges it took to close underperforming stores. The company makes of Broyhill and Thomasville furniture.

Shortly after reports surfaced on Tuesday about Microsoft preparing for a proxy fight to convince Yahoo shareholders to agree to a takeover deal that the Web pioneer's board has rejected, Yahoo announced a new severance plan for its employees if the company was sold.

Under the new plan , any Yahoo employee who is dismissed without good reason within two years of a change of control in the company will receive their annual base salary and certain benefits for at least four months and up to 24 months depending on position. Vesting of stock options and other equity-based compensation will be accelerated if a Yahoo employee is laid off after a sale.

Silicon Alley Insider's Henry Blodget thinks Yahoo's new severance plan could cost Microsoft between $1 billion to $3 billion if they seal a deal. There are a lot of assumptions baked into how he gets to this figure, but it's an interesting figure nonetheless. If the former Wall Street analyst's math is correct, then Microsoft's estimated $1 billion in "synergies" it expects to wring out of Yahoo from cost cutting and revenue benefits doesn't look so hot anymore-- at least not in the first year.

It’s hard to hide from the numbers.

Buyout volume has dropped 53 percent this year to $26.0 billion, down from $55.1 billion a year ago, according to research firm Dealogic. Financial sponsor deals accounted for 7 percent of total M&A volume this year, down from 11 percent a year ago.

The mega-deals have evaporated. Deals over $1 billion have seen the largest decrease, with only five deals of that size this year, compared with 17 deals in the same period last year, Dealogic said.

Merrill Lynch has some buyout bragging rights. It has been the top adviser for buyout activity this year with $6.8 billion in deals, followed by JP Morgan with $5.4 billion in deals and Goldman Sachs with $4.2 billion in deals, Dealogic said.

(PHOTO: Reuters)

A proxy battle for Yahoo, which Microsoft is reportedly set to authorize, would top $40 billion and be the largest on record — but faces some tough odds for success.

There have been 27 corporate proxy fights to facilitate a hostile takeover since 2001, according to FactSet SharkWatch (which has been tracking the data for 8 years), but only 12 went to an actual vote — with the rest withdrawn or settled.

Raiders won board seats in only 5 of the cases — and in 9 of them terms of the deal were sweetened. Below are the hostile proxy fights for companies with a market cap above $500 million since 2001, according to FactSet SharkWatch.

The soaring price of steel is firing up the market for iron ore prospectors. Australian prospector Midwest Corp said it had rejected a $1 billion-plus takeover proposal from its major shareholder, the Chinese commodities trader Sinosteel. Sinosteel is the second suitor rejected by Midwest, which says its potential to capture a sizable chunk of booming sales of iron ore to Asian steel makers is not fully appreciated. Japan’s Nippon Steel Corp and POSCO of South Korea this week agreed with Brazilian mining giant Vale to pay about 65 percent more for iron ore in 2008, which is likely to act as a benchmark for the industry. It is the sixth consecutive annual increase.

The chief executive of French bank BNP Paribas said it would be “logical” for BNP to be interested in French bank branches that might be put on sale by British bank HSBC. “It would not be totally illogical,” Baudouin Prot told reporters at the bank’s results news conference. Media reports earlier this month said HSBC was poised to put hundreds of its French regional bank branches on sale, with an estimated value of around 2 billion pounds ($3.90 billion).

Shanghai Pudong Development Bank, nearly 4 percent owned by Citigroup Inc, plans to raise about 40 billion yuan ($5.6 billion) by selling new shares in China, in what could be the largest-ever equity-linked financing by a listed Chinese firm. Sinopec, Asia’s top oil refiner, is currently set to take that title with an issue of up to 30 billion yuan of convertible bonds on Wednesday. “The size of the fund-raising is outrageous,” said Qiu Zhicheng, banking analyst at Haitong Securities Co in Shanghai. “It’s even more than the bank’s net assets (of about 30 billion yuan).”

ExpressJet Holdings shareholder Hayman Advisors plans to nominate two people to the company’s board at its 2008 annual meeting, and reported a 6.8 percent stake in the regional carrier, according to an amended regulatory filing. In an earlier filing, the fund had said ExpressJet should abandon its “branded flying” strategy and return to its fixed price and pro rate flying agreements.

Australia’s Healthscope has agreed to give up its 11.9 percent stake in rival Symbion Health, ending a 13-month battle against Primary Health Care to take over Symbion for A$2.7 billion ($2.5 billion). Healthscope had been holding on to the stake in the medical diagnostics group through a swap arrangement with Goldman Sachs JBWere to try to force Primary Health Care to sell it Symbion’s pathology labs in the states of Victoria and Western Australia.

South Korea gave conditional approval to SK Telecom’s $1.2 billion purchase of a stake in hanarotelecom inc, clearing the final regulatory hurdle for the deal. The antitrust watchdog Fair Trade Commission gave conditional approval for the deal last week. SK agreed to buy a 38.9 percent stake in hanarotelecom, South Korea’s No.2 broadband firm, from a consortium led by American International Group and Newbridge Capital.

Franklin Templeton said it had bought a 49 percent stake in Vietcombank Fund Management, its first joint venture in Vietnam to tap retail demand for mutual funds and stock investments. The remaining 51 percent stake in the fund management arm will continue to be owned by Vietcombank, the Bank for Foreign trade of Vietnam, the U.S. fund manager said in a statement. It did not say how it paid for the investment.