WSJ - U.S.'s Informal Inquiries
Have Gone to Major Players
Such as KKR, Silver Lake
By DENNIS K. BERMAN and HENNY SENDER
October 10, 2006; Page A3
The Department of Justice has begun an inquiry into potentially anticompetitive behavior among some of the world's leading private-equity funds, according to people familiar with the matter.
In recent weeks, Justice Department officials have sent out a series of letters to a number of the industry's most well-known players including Kohlberg Kravis Roberts & Co. and Silver Lake Partners but likely not limited to those firms.
These informal requests have asked for a range of information and documents related to deals and business practices, according to three people briefed on their contents, and ask about company auctions staged since 2003.
The Justice Department doesn't explicitly state a purpose for its requests, but those briefed on the matter describe the letters as expressing interest in matters broadly related to anticompetitive behavior.
The Journal's Dennis Berman explains how "murky" business practices among private-equity firms have caught the eye of the Justice Department.
It is unclear exactly who may be the subject of any inquiry, or whether any Justice Department action will develop from the information requests. A KKR spokeswoman and a Silver Lake spokesman declined to comment. A Justice Department spokesman also declined to comment.
The letters, from the New York regional office of the Justice Department, nonetheless put the clubby world of top-tier private-equity firms on notice that government officials are closely watching how they put together their transactions. And they come at a time when these funds -- which gather capital from institutions, pension plans, and state investment pools -- are on an historic buying spree for some of the country's corporate icons. In recent months, private-equity buyers have announced plans to purchase hospital operator HCA Inc., Hispanic broadcasting power Univision Communications Inc., and pipeline operator Kinder Morgan Inc.
For private-equity players, their daily battlefield is one of both fervent competition and cooperation-by-necessity.
At times the firms are avidly jostling with one another to gain an advantage in an auction. At other moments they are cooperating in "club" deals in which they combine their capital and know-how to pursue a given target.
A set of polite rules has largely applied to this dynamic. For instance, once a private-equity firm signs a definitive merger agreement with a target, competing buyout groups have shied from "jumping" the transaction with a competing bid.
The formation of the "clubs" -- which have drawn as many as seven members into one bidding team -- may at least theoretically depress prices because they limit the number of competing players in an auction.
Indeed, often these competitive auctions can have surprise endings as bidders who submitted a losing offer later join the winning group.
But the heads of private-equity firms say that such dynamics aren't evidence of collusion so much as the desire to share the risks with people who have already studied the business.
And at the heart of any inquiry into anticompetitive behavior is the nature of information -- how it is used, shared, and traded among a group of players.
If competing bidders were sharing information about their bids, for instance, or agreeing that the losers would later be invited to join in the winning group, that might represent suspect behavior, as it would artificially suppress prices that companies would fetch at auction.
"The issue of anticompetitiveness is a live one. It is easy to wonder about whether auctions can be collusive," says Josh Lerner, a professor at Harvard Business School who focuses on the private-equity firms. "So much is a repeat game. There are bitter confrontations but then they do deals with each other again and that softens things."
It is nonetheless difficult to define what exactly collusive behavior means, let alone prove it in a world where a dozen top firms constantly are battling with one another.
Executives at private-equity firms say it is hard to imagine that there would be something as overt as an exchange of promises not to compete on respective deals. At the same time though, many are aware that one of the reasons the fabled KKR deal for RJR Nabisco wasn't so lucrative in the end was that undisciplined bidding drove up the price and say that they have absorbed the lesson, which is to exercise restraint in the bidding process.
"The buyout business has always been competitive," said Steve Pagliuca, a senior executive at Bain Capital, at a recent conference. "It is just that now it isn't one on one but team versus teams."
If anything, private-equity executives say, the implicit gentleman's code is coming under pressure as firms jockey to lead the next big transaction. Such was the case for Freescale Semiconductor Inc., which signed a $17.7 billion deal with KKR, Silver Lake and Bain Capital. A rival group from Blackstone was close to mounting its own offer but ultimately backed away.
Is that a sign of anticompetitive behavior? Most private-equity executives would say not. "It has been civil and I expect it to remain so." said David Rubenstein, co-founder of Carlyle Group in a recent speech.
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also relevant (re: private equity):
Some Say Timing Leaves
The Upside for the Dolans
Following Lean Years
Putting a Value on the Knicks
October 10
For New York's powerful Dolan family, the time appears ripe for its $7.9 billion bid to take Cablevision Systems Corp. private: The cable company has been beating most phone companies and satellite-television operators in the battle for video, phone and Internet customers.
That's also why the bid could fail. The Dolans have taken Cablevision shareholders on a financial roller-coaster ride over the years, and some institutional investors say they are reluctant to sell now that the outlook is brightening.
"I'm getting tired of management and private-equity firms trying to steal companies from underneath our noses, and I think this is another example of that," says John Linehan, a portfolio manager at mutual-fund company T. Rowe Price Group Inc., which holds more than two million Cablevision shares. "Shareholders have been asked to sit through a fairly fallow period of time. As things are beginning to look up, a lot of our upside is being taken away from us."
On Sunday, the Dolans -- who control 22.5% of the company's shares and hold 74% of the voting power -- offered $27 a share for all shares outstanding. Some investors contend the company's assets, which include a cable division servicing the New York City region, cable networks like AMC and the New York Knicks basketball team, would be valued at as much as $40 a share if sold separately. Shares closed yesterday at $26.50, up $2.57, or 11%, in 4 p.m. composite trading on the New York Stock Exchange.
After years in the doldrums, the stocks of Cablevision and other cable companies have performed better this year, and some investors predict that the gains will continue. The sector has been held back by investors' concerns about major capital-spending needs, competition from phone companies and new technologies for delivering TV programming over the Internet.
The Dolans have argued that Cablevision would be better off as a private company, which would allow it to make investment decisions without worrying about meeting quarterly earnings expectations. The cable industry sometimes requires large investments that cannot be recouped over the short-term.
In a letter Sunday to the company's board of directors, the Dolans described their offer price as "fair." They noted that it represented an 11.3% premium above Cablevision's 52-week closing high and a 14.9% premium to their unsuccessful 2005 offer for the company's cable division. A spokesman for the Dolans declined to comment further yesterday.
In buyouts and takeovers, investors are always eager to get higher prices, and they sometimes succeed. The fate of the Dolans' offer now rests with a special committee of Cablevision's board that consists of two independent directors, Thomas V. Reifenheiser, a retired banker, and retired Vice Admiral John R. Ryan. That was the same board committee that rejected the Dolans' earlier buyout offer, and the family has a better sense this time of how to appease them. A Cablevision spokesman said yesterday the two directors were unavailable for comment.
Investor griping about buyouts has intensified this year after the sales of several publicly traded companies generated quick profits for buyers. Earlier this year, for example, Fairmont Hotels & Resorts Inc. was acquired for $3.3 billion by Colony Capital LLC, a Los Angeles investment firm, and Saudi Prince Alwaleed bin Talal's Kingdom Hotels International. Fairmont recently announced the sale of seven hotels, far less than half of its portfolio, to a pension fund for $1.5 billion.
In recent years, the antics of the Dolan family have drawn far more attention than Cablevision's performance. Cablevision Chairman Charles F. Dolan and his son, Chief Executive James L. Dolan, fought openly and bitterly over the fate of Voom, a satellite television unit that the senior Mr. Dolan supported but that his son helped kill. The family also tussled with New York City Mayor Michael Bloomberg over a new stadium that was proposed for Manhattan, which would have competed with Cablevision's Madison Square Garden. Recently, the company was drawn into the federal investigation of options backdating, admitting that it gave backdated options to an executive after he died.
Along the way, Bethpage, N.Y.-based Cablevision quietly has become the envy of the cable industry, in part due to the efforts of Chief Operating Officer Thomas Rutledge. He has kept the company focused on the cutting edge of phone and video technology. That has helped Cablevision to add more than 60,000 subscribers, while many rival cable operators were losing subscribers to satellite-TV competitors. The company has signed up about one million Internet-phone-service customers since November 2003, making it the cable-industry leader in grabbing market share, according to analyst Aryeh Bourkoff of UBS AG.
"My clients would like to see the company stay public with Rutledge at the helm," says Mario Gabelli, chief executive of Gabelli Asset Management, one of Cablevision's largest shareholders. If that doesn't happen, he says, he would like other companies to be able to bid against the Dolans. Time Warner Inc.'s cable division, he says, has long been interested. Time Warner declined to comment on the matter.
Some investors think the offer will be accepted by the board committee, noting that it is higher than the buyout offer made by the family in June 2005, when adjusted for the $10-per-share dividend that Cablevision paid earlier this year.
Other investors don't like what they see. The offer, they note, values the company at $19 billion, including debt. The Knicks, the cable-TV networks and additional assets other than the main cable unit are worth as much as $5 billion, they contend. That doesn't include the potential profits from a plan to redevelop Madison Square Garden, which the company is pursuing with Vornado Realty Trust.
That leaves a valuation of about $14 billion for the cable unit, they say, which is less than nine times the unit's earnings before interest, taxes, depreciation, and amortization, or Ebitda, a common metric in the cable industry. By contrast, Comcast Corp., the country's largest cable operator, is trading at more than nine times Ebitda. Many cable analysts contend that Cablevision's systems are more valuable than Comcast's because their average subscribers spend more.
Shares of Cablevision rose sharply yesterday but remained below the offer price, a sign that some investors think the buyout offer will collapse. That's what happened to the family's buyout attempt 20 months ago, after a special committee of directors found the price inadequate.
Cablevision's prospects looked bleaker in the summer of 2002. It was facing a cash crunch stemming from the debt it took on to finance cable-network upgrades, a perennial burden for the cable industry. In a presentation to investors, James Dolan outlined his plan for dealing with the financial problems that some investors criticized as rambling and unconvincing. The stock was trading below $5 a share.
To deal with its liquidity problems, the company laid off thousands of workers and sold noncore assets such as its Bravo cable network. It increased cash flow by steadily adding cable and high-speed Internet subscribers. By mid-2003, Cablevision's stock was over $20 a share.
Mr. Rutledge was one of the architects of the turnaround. He had joined the company in early 2002 after losing out in a struggle over strategy at Time Warner's cable unit, where he was president. He had extensive experience with customer service, network construction and other operational basics.
Cable operators were losing hundreds of thousands of subscribers to satellite TV companies. Mr. Rutledge pushed Cablevision to upgrade its technology. The company stopped using an advanced yet expensive set-top box manufactured by Sony Corp., opting for a more widely used device made by Scientific Atlanta Inc., now a unit of Cisco Systems Inc.
Cablevision increased spending on expensive network upgrades necessary to offer customers digital cable and high-speed Internet connections. "I found it painful personally to lay people off," says Mr. Rutledge. "But we had to manage the capital expenses for upgrades and get new businesses rolled out rapidly."
Verizon Communications Inc. targeted Cablevision's affluent New York City region for its rollout of TV and ultra-high-speed Internet. Last year, after James Dolan got mail from Verizon advertising its broadband speeds, he demanded that Cablevision match it, which it did.
Mr. Rutledge became the face of Cablevision on trade-show panels and on analyst calls, where James Dolan mostly discussed Madison Square Garden. He meets with Mr. Dolan every Monday, he says, to discuss everything from new technology to trimming trees in ways that don't anger homeowners. Together, they devised the "triple play" marketing strategy for selling phone, TV and high-speed Internet service in one package, which has been mimicked by much of the cable industry.
The Dolans had decided in the late 1990s to concentrate on the New York City market and had sold off their systems outside of it. That made it less expensive for the company to introduce new technology because just three distribution points served all its customers. The concentration on one region also made it easier to roll out phone service. Mr. Rutledge says he and the Dolans planned to do this as early as 2002, but were delayed by the wait for advances in Internet technology. The company avoided using traditional circuit-switch technology, which is more expensive.
The new phone service and the triple-play pricing plan, which costs customers $89.95 a month, caught on with customers. More than 20% of the homes reached by Cablevision's networks now take phone service from the cable operator, and most of those take TV and Internet service as well. Marketing experts say it is more difficult for rivals like Verizon to poach subscribers to Cablevision's three-service package than it is for them to steal traditional cable customers.
Mr. Rutledge also helped devise Cablevision's strategy for offering customers a service for recording live TV for later viewing. Most cable companies offered customers devices for their homes. While Cablevision does too, it's been reluctant to embrace that route, because the devices can cost more than $350 each -- a cost that was passed on to customers in the form of monthly fees.
Earlier this year, Cablevision announced a plan to build a recording capability into its network. Households that signed up for the service would be able to record programs without adding any special equipment to their homes.
The strategy raised questions about whether Cablevision would violate copyrights of programmers. Major movie and TV producers have filed suit against Cablevision, which is holding up the launch of the technology. |
