I guess it’s just an awkward coincidence, but a few days after TPG and KKR were part of a $US475.5 million settlement of a 7-year-old collusion lawsuit, they are both bidding the same price for Treasury Wine Estates.
The December 2007 class action accused 11 private equity firms of conspiring to drive down takeover prices and reduce takeover competition, often by agreeing not to outbid each other.
Of the 11, ten have now settled, the latest group being Blackstone, KKR and TPG, which have agreed to pay the money without admitting any wrongdoing. Only Carlyle Group is still facing trial.
We can be fairly confident that KKR and TPG are not colluding in TWE: the only reason TPG has proposed the same price as KKR -- $5.20 -- is that the board has nominated this as the price of a ticket into the data room.
Whether they bid against each other, and thereby vindicate last night’s closing price for TWE of $5.33 will depend on the data in the room, but if they were properly colluding TPG would have simply stayed out.
In any case the settlement of the 2007 case and the TWE bids conclusively mark the return of big, and aggressive, private equity, and the investment banks couldn’t be happier about it.
According to M&A research house, Dealogic, private equity companies accounted for 32 per cent of the $US20.4 billion in investment bank revenues so far this year.
Banks and investment institutions are tickled pink as well, because it means big juicy loan licks for banks at healthy margins and big juicy liquidity events for investors at healthy prices, as cash is transferred from bank to investor, minus the big juicy investment bank and private equity fees of course.
And with interest rates at record lows, it’s little that wonder the private equity firms are back in town.
The only problem is finding suitable fodder in a stockmarket that has been going up in a straight line for two years, which is why most of the deals these days are not like TWE, where the private equity firms make competing offers for expensive public companies. Most of the deals are more private: units of conglomerates or family businesses with a succession gap sold privately, not at auction.
But TWE is a special case -- a classic private equity play. It’s a business with a portfolio of great brands that has been poorly managed. Even better is it comes after a disaster that led to the sacking of the chief executive but before the new chief executive has time to even spell out his plan, let alone begin the turnaround.
Because of that mishap, the bankers -- broadly defined to include lenders, investment bankers and private equity -- will now get to feast on TWE, before returning it to the market.
If chief executive Michael Clarke’s lucky, he’ll be kept on to complete the job under private ownership and get let into the feast.
If he’s even luckier, he’ll be sacked: his contract provides that all of his long-term incentive plan grant will vest in the event of a change of control. The LTIP gives him performance rights of up to 200 per cent of his annual salary, and if there’s a change of control before the annual meeting, he gets it in cash.
Clarke was appointed on February 20 on a base salary of $1.7m and a short-term incentive plan worth 100 per cent of salary for hitting his “target”, capped at 135 per cent of salary.
So in all, he could make more than $7m for seven months work, which definitely beats a seven-year slog trying to turn a busted wine business around.
Instead, in seven years the winner of this auction will sell TWE back to the investors they bought it off, for a handsome profit, having done to the business what Michael Clarke was going to do, before he was so lucratively interrupted.