Bulls on a shopping spree (2022)

February 12, 2018 11:00 PM

Aaron Elstein

Buck Ennis

ROCK STAR: With $55 billion in returns 
and $108 billion in new investor 
cash in 2017, Blackstone co-founder Stephen
Schwarzman could become the first 
CEO of a publicly traded company 
to earn $1billion in a single year.

A select group of Wall Street executives is buying up assets at a pace that has rarely been seen before. The wallets of these big-game hunters—private-equity executives—collectively carry more than $1 trillion in cash, which they call dry powder, plus seemingly endless lines of credit. Almost no corporate target is outside their crosshairs.

Last year, helped by a relatively strong dollar and low interest rates, New York’s PE executives spent like a bunch of giddy tourists. They were buyers in 15 of the 20 largest deals involving city-based companies last year, according to Crain’s research. In all, they had a hand in 4,191 deals worldwide, worth a total of $347 billion.

More big deals are on the way because the firms are rolling in cash. And the recent market volatility might be more good news for them, as it could prompt weaker companies to sell at a discount. Last year Leon Black’s Apollo Global Management raised a record $24.6 billion private-equity fund in just six months, less than half the time it took Blackstone Group to raise a then-record $6.5 billion in 2002. North American private-equity firms raised a record $272 billion in new cash last year, according to research firm Preqin.

The king of the heap is undoubtedly Blackstone, long one of Wall Street’s most successful wheelers and dealers. The firm spent $50 billion on acquisitions last year, returned $55 billion from selling off previously acquired companies and pulled in $108 billion in new investor cash.

“I can’t even say that number with a straight face,” Blackstone President Tony James said of the infusion of funds during a conference call this month.

“The scale of our operations today is something I couldn’t have imagined when I started this business with my partner, Pete Peterson, 32 years ago,” added Blackstone co-founder Stephen Schwarzman who, based on those 2017 returns, could become the first CEO of a publicly traded company to earn $1 billion in single year.

Schwarzman and his fellow M&A titans didn’t invent private equity, but they were early adopters. The classic playbook—buy struggling companies with borrowed money, get rid of all but their most essential assets, boost performance and then sell—was called a bootstrap until it was rebranded as a leveraged buyout in the 1980s.

To counter their pop-culture image as hatchet men who buy, strip and flip companies, Schwarzman helped organize the industry’s first trade group just before the financial crisis—what became the Private Equity Growth Capital Council, now the American Investment Council.

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4,191: Number of M&A transactions worldwide that involved a New York–based private-equity firm

$347B: Total combined value of those deals

Whatever it’s called, the PE field has doubled in size during the past decade and today counts 5,000 firms controlling more than $2.8 trillion in assets, according to Preqin. Private equity is now where Wall Street’s biggest fortunes are made.Forbesestimated that there were 25 private-equity billionaires in 2016. Schwarzman’s net worth is pegged at $11.8 billion, KKR’s Henry Kravis’ at $5 billion. PE executives’ vast earnings are taxed at the advantageous capital-gains rate rather than as ordinary income, a lucrative loophole that survived the new tax changes.

Schwarzman is a prominent adviser and fundraiser for President Donald Trump, and James is a leading Democratic contributor. Arguably the greatest gift the firm ever got from Washington came when Obama administration regulators helped clear the competitive field by nudging commercial banks out of PE investing in the wake of the financial crisis.

Future gains

Thanks to fewer big competitors and years of rock-bottom interest rates, private-equity firms’ buying sprees have produced strong results for their investors. During the past decade private equity has generated annualized returns of 8.5% for public pension plans, twice the returns those plans earned from investing in stocks, according to Preqin. That fact is a major selling point to pension funds, many of which have invested in private equity in hopes the returns will narrow the often-wide gap between what they have to pay current retirees and the size of their future commitments.

New York City’s pension system, for instance, has $11 billion in private-equity investments, which have returned 9.9% since 1997. That return is below the 13% target set by the funds, which have paid hefty fees for that underperformance because PE managers typically collect 2% of the assets and 20% of the profits. Still, many institutional investors continue to pin their hopes on private equity. The New York State Common Retirement Fund, for example, predicts that its PE portfolio will return 7.75% annually over time, better than stocks, bonds, real estate or any other assets the fund currently invests in.

Although plenty of PE deals still rely on the “buy, strip, flip” textbook, many firms are looking to invest in promising Silicon Valley ventures. Last year KKR joined a group that invested $1.5 billion in Lyft, while General Atlantic and TPG joined a consortium that put $8 billion into Uber.

The firms are also big investors in New York’s own burgeoning tech scene. Kenneth Ziegler, chief executive of cloud-computing-services provider Logicworks of Manhattan, said his company elected to be acquired by a private-equity firm for $135 million in late 2016 after fielding bids from 15 potential suitors. The new owner has given Logicworks the resources to double its staff to 150 and pursue new business in a fast-growing field.

“Nothing is weighing us down now,” Ziegler said. “We can really go for it.”

The buyer was Pamplona Capital Management of London—a fitting moniker, in Ziegler’s estimation. “They had a bullish point of view,” he said.

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ALL EARS

No 2017 deal was more surprising than Rupert Murdoch’s decision to sell most of his media empire to Disney for $77billion. If the merger is completed, Disney will control a Hollywood colossus that includes stakes in streaming service Hulu as well as the Yes Network and several other regional sports channels. And it will account for 40% of total box-office receipts.

But it’s still a big “if,” as the federal government might not approve the deal as constructed—despite Murdoch being on President Donald Trump’s speed dial. After all, the proposed merger between AT&T and Time Warner has been held up by the Justice Department, which has argued that the combined company would have too much power to raise rates on cable and satellite consumers.

But there may be a way for Disney to avoid potential entanglements: Make more deals.

To persuade antitrust authorities to sign off on the Fox merger, Disney could sell Hulu to, say, Comcast. It also could shed Fox Searchlight, a studio that focuses on the sort of films that don’t fit well with Disney’s blockbuster franchises.

If Disney would rather retain those assets, analyst Richard Greenfield at BTIG Research said, it has other options to placate the Feds. It could, for instance, dim its baseball broadcasting power by selling some regional sports networks, such as Yes—a potentially bitter pill to swallow given the Yankees’ expected resurgence.

Another intriguing prospect, according to BTIG, is for Knicks owner James Dolan to buy Yes and consolidate it with his MSG Networks. Dolan has been trying to sell those cable channels for more than a year, but 20 years ago his father, Charles, fought to buy a stake in the Yankees. Perhaps acquiring the team’s cable channel is the next-best thing.

Meanwhile, more media companies are likely to merge, especially as Facebook and Amazon morph into broadcasting networks. BTIG reckons Amazon soon will acquire rights to Thursday Night Football for $600million. If that happens, and even if it doesn’t, look for CBS and Viacom to rekindle their merger talks and hammer out a reunification.— A.E.

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RETAIL BUYS

Everyone knows that retailers are being done in by the rise of e-commerce. Radio Shack, which had 116 stores here a decade ago, is down to its last three. Duane Reade closed 43 stores in the city last year. Whole Foods raced into Amazon’s arms.

Amid last year’s carnage, private-equity firm Sycamore Partners stepped in and paid $6.9billion for Staples, which, according to the Center for an Urban Future, has closed 25% of its stores in the city since 2010. So why is Sycamore buying what would appear to be a wilting asset?

Launched in 2011 by Stefan Kaluzny, a native New Yorker who shuns the press and declined to be interviewed, Sycamore acquired the ailing Talbots chain in 2012 for $193million, an investment that netted a six-fold return, according to Bloomberg News. Kaluzny, a co-founder of Chicago-based grocery chain Delray Farms, has since made big bets on shoe sellers Nine West and Stuart Weitzman. Last year Sycamore bought The Limited Stores’ brand and e-commerce business after the retailer filed for bankruptcy.

Staples, the firm’s biggest bet, looks to be yet another retailer in a death spiral, with same-store sales declining every quarter since at least 2013. But about 60% of its office-
supply sales happen online, so perhaps it has a future without all that brick and mortar.

Although Kaluzny described Staples as an “iconic brand,” he didn’t shell out much for it, paying a price equal to 0.35% of Staples’ revenue, making it one of the cheapest big PE deals on record, according to Bloomberg. Plus, the $6.9billion price wasn’t as formidable as it might seem, as Sycamore put up just $1.6billion in cash and borrowed the rest—standard fare in the world of leveraged buyouts. But the new debt wrecked Staples’ credit rating, which Standard & Poor’s cut four notches: from investment grade to a deep-junk B+.

With more than $3.5billion under management, Sycamore is small by private-equity standards, but the firm certainly has no shortage of ailing retailers to sift through. Macy’s stock price has sunk by 65%, Ralph Lauren’s is down 42%, and J.C. Penney’s market value is now just $1.1billion.— A.E.

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Practically every sector of the health care industry caught the consolidation bug last year, including hospitals, health insurers, medical suppliers and pharmacies.

It’s no coincidence. “Consolidation breeds consolidation,” said Allen Miller, CEO of consulting firm COPE Health Solutions of Manhattan. “People get threatened and concerned when they start to see other folks potentially gaining a leg up.”

In the hospital sector, there were 115 transactions nationwide, a 13% increase over the previous year, according to Kaufman, Hall & Associates of Skokie, Ill. Six of those deals were in New York state, including Mount Sinai Health System’s arrangement to become the active parent of South Nassau Communities Hospital.

But as hospitals gain market clout, suppliers feel threatened. Becton Dickinson of Franklin Lakes, N.J., announced in April that it planned to acquire fellow medical-supply manufacturer C.R. Bard for $25.8billion to broaden its product portfolio. The deal closed in December. The company was motivated in part by hospital consolidation, Vincent Forlenza, Becton Dickinson’s CEO, told The Wall Street Journal.

Buyers also made deals last year to expand into new markets. St. Louis–based Centene Corp., the largest operator of Medicaid managed-care plans nationwide, agreed in September to acquire nonprofit insurer Fidelis Care of Queens for $3.75billion in cash and stock.

Some acquisitions have bridged sectors. CVS’ deal to buy Aetna for $69billion links the retailer and pharmacy-benefit manager with an insurer, offering the opportunity to lower Aetna members’ health costs by managing their chronic diseases at CVS clinics.

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Perhaps the most industry buzz surrounds the joint venture between Amazon, Berkshire Hathaway and JPMorgan. Details have been scant, but the new company’s stated goal of lowering employer health care costs while improving employee satisfaction is telling.

“They’re frustrated with the pace of change,” said Anu Singh, managing director at Kaufman Hall.— Jonathan LaMantia

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