The Answer Is Private

What kind of buyers and sellers made the greatest strides in deal-making for 2004?

Harris says Apollo “thought it would be easier to grow [Borden Chemical] as a private company.” Sure enough, just three months after going private, Borden was able to acquire German resin manufacturer Bakelite AG.

Apollo has several chemical companies in its portfolio, including businesses and product lines from Kingsport, Tennessee-based Eastman Chemical Co. and the epoxy-resin business of Shell Chemicals. Such industry concentrations are common among PE firms, suggesting to some the prospect of a return to the roll-up approach to acquisitions. Not surprisingly, PE participation is heavy in such areas as power generation, communications, and movie-theater chains, where consolidation is needed, but where shareholder skepticism inhibits public-equity deals.

Strategic, Financial, or Both

Some might even argue that, given CEO Edward Lampert’s 52.6 percent control of Kmart Holding Corp., his purchase of Sears, Roebuck and Co. was a form of private-equity deal. Certainly, retail is ripe for consolidation. And there can be no doubt that the $1.2 billion sell-off of Target Corp.’s Mervyn’s stores was largely a PE transaction.

CenterPoint’s Whitlock notes that “there were fewer regulatory issues” facing the GC Power consortium for the Texas Genco unit — notably questions about concentration of market power — compared with the questions raised for the Texas-based utilities that bid.

Of course, all potential buyers faced some regulation, particularly related to the six months or so it will take the Nuclear Regulatory Commission (NRC) to approve the transfer of Texas Genco’s nuclear-power plant interests as part of the deal. But that, too, resulted in an advantage for financial buyers.

“We looked at value in terms of making sure money was in the hands of our shareholders as soon as possible,” says Whitlock. GC Power structured a two-step buyout, providing the funds for Texas Genco to buy out its minority shareholders, and then immediately purchasing the unit’s fossil-fueled plants for $2.2 billion. Once the NRC approves the nuclear portion of the deal, GC Power will buy the rest. “That would have been difficult for a strategic buyer to do,” says Whitlock.

To be sure, running a nuclear plant is no easier for a financial buyer. But Whitlock says GC Power, while clearly a financial buyer, is actually something of “a hybrid,” since its CEO is Jack A. Fusco, the former chief executive of a publicly traded power-plant holding company. In fact, Whitlock notes, each GC consortium member individually owns generation assets already, and is likely to buy more.

Indeed, “it is harder today to discern a strategic buyer from a financial buyer than it was four years ago,” says Robert Daleo, CFO of The Thomson Corp., which in November sold its Thomson Media Group to Investcorp for $350 million. Despite a name that would suggest otherwise, Investcorp was viewed as strategic, and preparing to build up the business, not flip it, says Daleo. “If a financial buyer pays a strategic premium,” he asks, “is it really a financial buyer?”

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