Monday, November 13, 2006

Squeeze 'em 'til it Hertz

They're the pin-up boys of the Hi-Fi world(the music-to-your-ears High Finance crowd). We're speaking of the financial geniuses of Wall Street, who mop up more than all the janitors in New York, Tokyo and London combined.

Just have a quick squidge of these articles:
Deals of the Year: Large-Market Lender

Structured finance issuance worldwide in 2005 reached $3.7 trillion.

Buyouts announced this year have already reached a record level in excess of $200 billion

Bonuses at Wall Street Big Five Surge to $36 Billion

These are the kinds of guys that know how to buy your house off you, mortgage it beyond it's appraised value and pocket the loan, and then sell it back to you for more than they paid you in the first place, while getting all the agent's fees, legal fees, finance fees and whatever expenses and tax benefits can be had to boot. Now that's pretty neat, and Guambat merely stares in wonder and awe.

Nowhere is this game more elegantly played than in the Hertz deal. You know Hertz; they rent cars. Ford acquired in long ago, and with the demise of the American automobile industry, Ford sold it a year ago. Now Ford, of course, is a publicly owned company, and was going to sell Hertz in a public sale, until the clever guys got involved. The guys who bought it are anything but public. And now they're going to sell it back to the public for a motza. Elliot Spitzer might portray it as a killing.

But, you ask, why would you, the public, buy back that pig in a poke? And the answer is that you will have no say in it. Since everyone these days has some kind of government imposed or enticed retirement program, everyone has a piece of the big public company domain, but no say in how that public domain is handled. The funds will do it all for you, and you will pay them dearly for it, and they will dearly love you. And it is the funds that make the private buy-out work in the first place, and stick back to you in the last place.

The Hertz deal, in an over-simplified nutshell, is this: The private guys put up $2.3 billion in cash to "buy" Hertz from Ford for a purchase price of $15 billion. The $12.7 billion difference was borrowed money which Hertz must pay back.

Now, they want to sell 27.5% of the company to the public, and keep the remaining 72.5% for themselves. They plan to get $1.8 billion from the public sale. So, let's see, they put up $2.3 billion for the whole enchilada and sell a small slice of it and are only cash out of pocket to the tune of half a billion dollars (2.3 minus 1.8) and own and control most of the company.

Sounds like a really swell deal for them.

But wait, there's more!!

Just before they sell that small slice off to the public, they, get this, have Hertz borrow more cash, and pay themselves a neat one billion dollars dividend! Merely on cash they're, what, five hundred million dollars ahead?


But wait, there's more still...

What is Hertz going to do with that money they get from selling that small slice of stock to the public? Why pay themselves about a quarter of it! "Proceeds will go toward paying off the loan that funded the dividend and for a second disbursement of $426.8 million."

And, yes, there is still more!!!

Consider this, if they get $1.8 billion for a sale of 27.5% of the company, that would value the whole company at over $6.5 billion dollars, and make their remaining piece worth about $4.75 billion dollars.

So, even if they don't get all that they plan to get from the public sale, they are already miles ahead. They've managed to get all of their original $2.3 billion cash investment back, rake off almost one billion dollars in cash more, and end up with stock worth twice their original investment.

Not bad for a few months work, neh? Is that adding value or what?

So, don't let anyone tell you that if something sounds too good to be true is probably isn't.

See the following for more on this rip-off.

LBOs are to corporate balance sheets as fast foods are to slim bodies

Buy It, Strip It, Then Flip It

Hertz nearly doubles IPO value for buyout firms

Buyout boys who travel at 100 miles an hour (This article has much in common with the BusinessWeek one, but stay with it beause they do finish differently.)

Deutsche Bank Loses Hertz IPO Role Because of E-Mails

Merrill Increases LBO, Trading Risks to Boost Returns

Clayton Dubilier to Increase Fund to $5 Billion, Person Says

Merrill Gets Justice Department Query on Buyouts, Person Says

But Bloomberg's Mark Gilbert has a sanguine view of it all:
KKR Lifts Buyout Bar as Bond Markets Limbo Lower
Buyout firms have raised a record $170 billion in new funds this year, according to London-based research firm Private Equity Intelligence Ltd. Their coffers are being inflated by the same trends that have driven an additional $110 billion into hedge funds this year, valuing that industry at $1.3 trillion. Investors desperate for yield are shoveling more money into so- called alternative investments as profit opportunities in the vanilla markets of stocks and bonds disappear.

In the stock markets, companies have sold about $36 billion of new shares in the U.S. this year, compared with $72 billion in Europe and $72 billion in Asia. The pace of sales is struggling to keep up with the withdrawal of stock by companies being taken private or buying back shares. The U.K. equity market, for example, hasn't grown in combined market value since the final quarter of 2004, and shrank by about $89 billion in the first half of this year, according to the Financial Services Authority, which regulates U.K. markets.

Private equity has financed more than $522 billion of acquisitions this year, more than double the 2005 level of $213 billion, according to data compiled by Bloomberg. The biggest deal came in July, with the $33 billion purchase of U.S. hospital chain HCA Inc. by Kohlberg Kravis, Bain Capital LLC, Merrill Lynch & Co. and HCA co-founder Thomas F. Frist Jr.

The list of potential buyout targets includes some big companies. Kohlberg Kravis, whose 1988 takeover of RJR Nabisco Inc. was detailed in the book ``Barbarians at the Gate,'' held talks with Marsh & McLennan Cos., the world's largest insurance brokerage firm, with a market value of more than $17 billion.

Suki Mann, a credit strategist at Societe Generale SA in London, says very few leveraged takeovers have trashed the debt of big European companies mooted as buyout targets. ISS A/S, the world's largest cleaning company; TDC A/S, a Danish phone company; Dutch media company VNU Group BV; and U.K. airport operator BAA Plc are the only investment-grade borrowers bought by private-equity firms since the first quarter of 2005.

Fewer lower-rated companies are failing to pay their debts. Moody's Investors Service said this week that the global default rate among sub-investment-grade borrowers is 1.7 percent, down from 1.9 percent at the beginning of this year and from 2 percent in November 2005. Just 21 borrowers defaulted on $7 billion of bonds in the year through October, compared with 28 defaulters reneging on almost $20 billion of securities in the first 10 months of 2005, the rating company said.

Meantime, the growth of the credit-derivatives market is removing so-called contagion risk. Now that credit-default swaps allow investors to isolate specific borrowers, they can immunize their corporate-bond holdings from events affecting an individual company by buying single-name protection. So buyout speculation prompts big swings in the credit-default swaps of particular companies, with little or no effect on the overall credit market.

Kohlberg Kravis's attempted seduction of Vivendi should put buyout risk back at the top of the list of potential catalysts for money managers to start shunning corporate bonds. Yet the cost of insuring debt against default declined to record lows this week in both the U.S. and European markets -- evidence that it will take more than a few barbarians at the gate to unsettle the credit markets.


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