Can American Capital find a rich suitor?
More consolidation may be coming to the world of private equity lenders. Debt-laden Allied Capital solved its long-standing problems last week when it sold itself to Ares Capital. Rival American Capital, once an S&P 500 component but now struggling for survival, could be the next takeover target.
But some investors wonder if Allied got a raw deal. Ares paid $3.47 a share in stock for a company that had a book value of $7.49 in June. One law firm has already launched a “shareholder investigation“. Similarly, American Capital’s shares trade below $3, compared with a book value of $8.76 at the end of June.
Ares Capital is one of the rare healthy players in the field. It has a strong balance sheet and minimal liquidity concerns, and it has managed to pay a dividend throughout the worst U.S. recession since the Great Depression. For an Allied shareholder used to a continuous flow of bad news, swapping that stake for an investment in a healthy company must seem like a good move.
Like Allied, American Capital has suffered as the recession reduced the value of the companies it invested in. As a result, it’s gotten harder to sell them except at distressed prices. That value reduction is a big blow for a cash-starved company that has already defaulted on $2.3 billion of debt.
Both American Capital and Allied have sold portfolio companies at heavy discounts to their purchase prices. Now with equity markets sharply up from their doomsday-scenario lows in March, American Capital is on an aggressive selling spree. Recently it sold components distributor Imperial Supplies to W.W. Grainger and life sciences equipment maker Axygen BioScience to Corning.
Unfortunately for American Capital, it may not have all that many more companies in its portfolio to sell at decent prices. Its best bet may be to find a healthy suitor for itself so it can return some capital to shareholders before it’s too late.
– Anurag Kotoky
Hot Chocolate
How much sweeter will Kraft’s bid for Cadbury get? Chief Executive Todd Stitzer seemed to be telling investors — according to banker’s note we got hold of — that a 20 percent higher bid from Kraft, or about 12.2 billion pounds ($19.93 billion), would be a fair price. Investors don’t seem to have bought into his enthusiasm, having not bid the stock to anywhere near such a premium.
“On price, Todd seemed to admit that a 15x EBITDA multiple would be a fair price,” the note by Bank of America/Merrill Lynch sales specialist Simon Archer said. Analysts say a multiple at that level puts the price for Cadbury at around 900 pence per share.
Archer has since issued a clarification saying Stitzer’s comments “were only in the context of comparable transactions being in the mid-teens – he was not implying a fair value for the business”.
Kraft initially bid 745 pence per share, or 10.2 billion pounds. After the recent fall in Kraft shares, the cash-and-stock offer is now worth around 718 pence per share. Cadbury shares were steady at 793 pence on Wednesday.
Stitzer also apparently told investors he does not expect Kraft to walk away from the deal and talked about the strategic and revenue positives from a tie-up. The only question he must have is just how high Kraft is willing to go. Twenty percent, even in the context of other deals in the industry, could be seen a starting point for a round of hearty haggling.
Chris Kaufman; DealZone Editor
I was a sales representative for Kraft Foods for a few years and witnessed the acqusitions/divestitures of many household consumer products from within. Who in their right mind would divest themselves of ALTOIDS, LIFESAVERS,POST CEREALS ? Kraft Acqusition disasters such as VERY FINE JUICES,FRUIT 2/0,etc.etc. Look what Wrigley’s (ALTOIDS & LIFESAVERS) or new owner’s of POST Cereals has performed in a short time. What does that tell you about Kraft Management ? They simply lack the management abilities and talent to develop anything ! What in the world do they think they can accomplish with Cadbury ? Truth is stranger than fiction…
High-frequency trading: useless and manipulative?
The explosion of interest in high-frequency trading has started to drag new faces to sometimes staid industry conferences. Traders who for years worked on algorithms and computer codes behind the scenes are stepping into the spotlight. They’re appearing on more and more panel discussions, feeling the need to defend their practice against the slings and arrows of politicians and regulators.
So far, they’ve managed to mix exasperation with good humor. The head of one high-frequency trading shop, speaking on a panel this week, said that if you believe everything you read in newspapers you might think the practice is “an unfair, highly profitable and socially useless trading strategy implemented by highly secretive and unregulated traders using superfast computers to compete with retail investors, manipulate markets and front run flash orders causing volatility in the financial markets and creating systemic risk.”
He argued that a more accurate definition of high-frequency trading would be, “a wide variety of highly competitive, low margin trading strategies implemented by professional market intermediaries who have invested heavily in technology that have the effect of making the markets more efficient by enhancing liquidity and transparent price discovery to the benefit of investors.”
HFT is a technologically sophisticated method for sucking profit from trades that would have taken place anyways. As such, it serves no valuable market function, instead only serving those who stand to profit from this momentary insertion into the stream of commerce. To argue that it is beneficial due to its reduction of spreads is fallacious. Improved transparency would also serve to accomplish this reduction. Legislation to mandate a minimum holding time on all purchases would do away with this practice that serves no meaningful market function.
Energy asset on block at Blackstone?
One intriguing remark that Blackstone COO Tony James let slip on today’s earnings call is that it could be gearing up to sell an energy asset. James explained that while opportunities to exit investments weren’t numerous, it had succeeded making a profit on the sale of pharmaceutical company Stiefel. “We have another company in our portfolio… in the energy sector, which had some very, very exciting results finding unbelievable amounts of hydrocarbons and… that might be something we’d look to exit,” James said on a call to the media. He didn’t identify the company so we’re doing the guessing ourselves — out of the current energy investments Blackstone lists on its website, we reckon Kosmos Energy, which has a significant oil field in Ghana, could fit the bill.
(Additional reporting by Mike Erman)
Customer to Venture Capitalists: Please, go out of business
Even in the depths of a recession, venture capitalists are relentlessly upbeat, but one of their big customers poured cold water on that Thursday, asking some members gathered in Boston for the annual meeting of the National Venture Capital Association to go out of business.
“I hope some of you go out of business. I hope that does happen,” Rebecca Connolly, a partner in Fairview Capital, said on a panel. Her West Hartford, Connecticut, firm has about $3 billion under management, 70 percent of it in venture capital funds and the rest with private equity. Fairview, a fund of funds, manages money for pension funds and endowments
Connolly said that until 2000, venture capital provided good returns but since the dotcom bubble burst in 2001 returns have been very disappointing, hardly justifying the investment. Venture capitalists are supposed to find small companies with big potential and help them grow into big companies, like Microsoft, Starbucks or Intel.
“Let’s just flush everything out and get back to less competition, less money,” Connolly said, adding a caveat: “Just not my funds.”
The venture capitalists meeting here have been pondering what to do to start making more money again. They discussed ways to get initial public stock offerings going again, which are a good source of high returns.
When venture capital firms disappear they don’t die with a bang, or even a whimper. Instead, they just fade away, as partners are unable to raise new rounds of funding for investment. One senior official of the NVCA, asked about Connolly’s comments and whether lots of funds were starting to disappear, had a succinct answer: “I don’t want to talk about it.”
Photo: Fairview Capital
Hey Boomja, might I recommend “revenues” as a way to fund future investments. A revolutionary concept, I know, but one that works.
What a joke. Yea all their companies have accurate marks.
They are in default on covenants. The debt holders are in the drivers seat.
Next sell off in the stock market and they will be forced to file. Then Malon can go back to the commune.