DealZone

from The Great Debate:

Carried interest and the big lie

As an investment strategy, making private equity and hedge fund managers rich is a probable loser. As a tax policy, it is a guaranteed one.

The U.S. House of Representatives passed a bill last week that would raise the taxes that private equity and other investment managers pay on "carried interest," their share of the takings when a holding such as a startup or turnaround is sold at a profit.

Carried interest is currently taxed at the lower capital gains rate, meaning that many private equity barons can pay less in tax than the people who clean their swimming pools or mind their children. This is patently unjust. Carried interest is compensation for labor, earned income in other words, rather than gains on capital that might be lost.

As you might expect, the private equity industry is not happy:
"Remember we manage money for union employees, for corporate employees, for teachers, firemen and the like and our job is to help these unions and pension funds protect their employees when they retire. This is why private equity needs to have the treatment we have to attract the best and brightest to this sector." Robert L. Johnson, of private equity firm RLJ Companies told CNBC television.

"Many state pensions and corporate pensions are terribly underfunded. You take away the some of the incentive on this industry and its going to backfire on the people who need pensions when they retire."

Goldman builds exposure to China insurance market

Having taken a nibble at the Chinese insurance market in December, helping number three life insurer China Pacific Insurance list a $3.1 billion IPO in Hong Kong in December, Goldman Sachs is taking a bigger bite at that most promising and enticing of global investments, China’s financial products industry.

Sources tell us that an investing arm of Goldman is in the final stages of an agreement to buy AXA’s $1.05 billion stake in Taikang Life, China’s No.4 life insurer. The deal would allow France’s AXA to shed a non-core asset, while granting Goldman a piece of China’s growing insurance industry, report George Chen and Michael Flaherty.

Several private equity firms, including Kohlberg Kravis Roberts & Co and Blackstone Group, competed in the Taikang auction, as did Singapore’s Temasek Holdings, sources have told them.

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British insurer Prudential is to list in Hong Kong on May 11 and announced a secondary listing in Singapore to fund its $35.5 billion takeover of rival AIA, AIG’s Asian life insurance business.  Prudential said it would publish prospectuses for each of the listings on May 5.

U.S. air carriers United Airlines and Continental are considering a nil premium all stock merger to create the world’s largest airline valued at about $6.6 billion.  US Airways earlier dropped out of merger discussions with United. Many believed United had only entered talks with US Airways to draw out Continental, arguably a better match for it.

CenturyTel is to buy Qwest Communications in another stock deal, valuing the combination of the U.S.’s third and fourth largest landline telephone companies at $10.6 billion. The deal is designed to let the new business, CenturyLink, cut costs and compete more effectively, as consumers increasingly unplug their phone lines and go mobile.

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The world’s largest credit and debit card processor Visa is to pay some $2 billion for CyberSource, a company that helps retailers take online payments, including from mobile phones. Analysts estimate Visa already has 45 percent of the online market and the deal will only serve to boost the company’s position further.

The U.S.’s largest mall owner Simon Property Group has sent a revised recapitalization plan to rival General Growth Properties, which would see new investors, including Oak Hill Advisers, RREEF, ING Clarion Real Estate Securities and Taconic Capital, inject a further $1.1 billion into the business. Simon has already offered to invest $2.5 billion for about a quarter of its rival, while  Paulson & Co — the U.S. hedge fund that bet against Goldman Sachs Abacus mortgage product — injecting a further $1 billion.

Film moguls Bob and Harvey Weinstein and backer Ron Burkle could reach a deal for Walt Disney’s Miramax Films within days, despite a rift between the Weinsteins and one of their minority shareholders Mark Cuban.

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Australia’s competition watchdog blocked National Australia Bank’s $13 billion agreed deal for wealth manager Axa Asia Pacific Holdings, opening the door for rival bidder AMP to make a comeback. Australia’s competition regulator defied expectations it would give conditional approval for a deal, instead issuing a flat rejection on the grounds a tie-up would hurt competition for retail investors.

British train and bus operator Arriva said it is in advanced talks with Deutsche Bahn about the German state rail company’s 775 pence a share bid, valuing the company at 2.7 billion euros including debt.

European consumer goods group Unilever will kick off the sale of its frozen food arm Findus next week, expecting to draw bids from private equity groups including Permira, Lion Capital and BC Partners.

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Cerberus Capital Management said it would buy defense contractor DynCorp International for about $1 billion in cash in one of the biggest leveraged buyouts of a publicly traded US company since the global financial crisis.  Read the Reuters story here.

A subsidiary of China’s Sinopec Group agreed to pay $4.65 billion for ConocoPhillips’s stake in a Canadian oil sands project, marking the country’s second largest investment in North America.  Read the Reuters story here.

And in stories reported by other media on Tuesday:

Buyout lender Intermediate Capital Group has raised 843 million euros for a new fund that will invest in debt-burdened private equity deals, the FT said. The fund will buy debt at a discount and provide fresh capital for European companies worth as much as 500 million euros.

The afternoon deal: “American Idol” edition

AMERICAN IDOL/As “American Idol” enters the heated top-10 portion of its talent competition this week, there’s chatter offstage as the show’s parent company confirmed on Monday it’s in sale talks.

CKX, which also owns the rights to the “So You Think You Can Dance” TV franchise and the Elvis Presley name, stopped short of saying who it’s holding discussions with and warned there is no assurance the sale will close.

The Wall Street Journal reported last week that One Equity Partners, JPMorgan and Co’s private-equity arm, is nearing a buyout deal to take the entertainment group private “for roughly $6 a share,” with CKX CEO Robert F.X. Sillerman set to retain a roughly 20.6 percent stake in the company.

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Royal Dutch Shell and PetroChina have secured Arrow Energy’s coal-seam gas assets for $3.1 bln after sweetening their offers for the business.  The fresh bid was pitched at a 35 percent premium to Arrow’s share price before the first offer was announced, highlighting burgeoning interest in the coal-seam gas industry.

The former chief exexcutive of AIG is to sell most of his stock in the U.S. insurance giant to a unit of Swiss banks UBS. The deal for the 10 million shares, at about a 20 percent discount to Friday’s closing price, will earn Maurice “Hank” Greenberg $278.2 m.

Private equity firms are interested in acquiring and merging two German department store chains. U.S. firms are interested in acquiring Metro’s Kaufhof and Arcandor’s Karstadt chains, people familiar with the matter said.

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Lehman Brothers Holdings Inc used accountancy gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008, a court-appointed examiner has found. The good news is, but there was not extensive wrongdoing.  Read the Reuters story here.

Norway’s Yara International said on Friday it would not raise its offer for Terra Industries to match or exceed a rival bid from CF Industries Holdings Inc, Reuters reported. Yara agreed last month to buy Terra for $4.1 billion to create the world’s biggest mineral fertiliser producer.

And in news from other media on Friday:

Buyout firm Advent International has appointed advisors to assess a possible sale of budget store chain Poundland, the Financial Times said. The group has hired Close Brothers to look at options.

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American International Group could learn the fate of the stalled $2.2 billion sale of its Taiwan unit Nan Shan Life Insurance as early as Thursday, when Taiwan’s parliament will review a report on the deal from the top financial regulator.  Read the Reuters story here.

A clutch of private equity firms have bid up to 400 million pounds for British greetings card retailer Card Factory, sources familiar with the process told Reuters. Here is the story.

And in news reported by other media on Wednesday:

Barclays is looking to buy a retail bank in the US to extend its presence after buying Lehman Brothers, reports the Wall Street Journal. Barclays is not in talks and no deals are imminent, but has designated an internal team to assess possible targets.