Ambac Regulator Wins Support From Dunkin Brands on Plan
May 24, 2010 by Jim Coen
Filed under Brand News
Jody Shenn of BusinessWeek reports that Ambac Financial Group Inc.’s regulator won support from Dunkin Brands Inc., Sonic Corp. and Hertz Corp. as he seeks to overcome objections from some of the insurer’s clients to his plan to rehabilitate the second-largest bond guarantor.
Executives of donut retailer Dunkin Brands, drive-in restaurateur Sonic and car-rental firm Hertz, all of which issued Ambac-insured bonds, filed affidavits in support of Wisconsin Insurance Commissioner Sean Dilweg’s motion in state court yesterday opposing the legal bids by two groups of bondholders. Opponents of his plan said it would favor banks who bought default protection on one type of mortgage security.
“Aside from being factually wrong” in their allegations about the plan, Dilweg’s challengers should be turned aside because the commissioner “has broad discretion to decide how to best to protect policyholders and the public from the grave risks posed by Ambac’s deteriorating condition,” the department’s lawyers at Foley & Lardner LLP said in the filing.
Two months ago Dilweg forced New York-based Ambac’s insurance unit to split in two after its capital was depleted by projected losses on collateralized debt obligations tied to subprime mortgages, halting payments on $35 billion of other mortgage bond policies and additional contracts.
At the same time, Ambac reached a tentative agreement to pay $2.6 billion in cash and $2 billion of surplus notes to banks holding $16.5 billion of insurance on CDOs that was left in its main account. Surplus notes can be paid if the company has enough capital at some later point in time.
‘Substantial Collateral Damage’
“A rehabilitation of Ambac in its entirety could have substantial collateral damage in several facets of Ambac’s business,” Roger A. Peterson, a director in Wisconsin’s office of the commissioner of insurance, said in the filing. That could include requirements for borrowers such as Dunkin Brands to make accelerated payments on certain debt if Ambac were seized completely, he said.
Dunkin Brands Chief Financial Officer Kate Lavelle said in an affidavit that a failure of Ambac would result in a “very substantial restriction of operational cash available to” the donut company because of agreements related to a $1.5 billion “whole business securitization.”
The filing by the insurance department of Wisconsin, where Ambac’s insurance unit is based, also included affidavits by Sonic CFO Stephen C. Vaughn and Hertz Corp. Treasurer R. Scott Massengill.
Opposed to Plan
Policyholders seeking to block Dilweg’s plan include owners of residential mortgage-backed securities such as hedge fund firms Aurelius Capital Management and Fir Tree Partners and holders of Las Vegas Monorail Co. municipal debt such as mutual fund manager Eaton Vance Corp. The RMBS holders would receive 25 cents on the dollar in cash for their claims and the rest in surplus notes under his plan.
Their argument that they would get less than CDO holders isn’t accurate because the CDO settlement offers between 35.8 percent and 54.4 percent of projected claims, while mortgage- bond claims would be paid in their entirety, as they arise, when considering the surplus notes they would also receive, the department said, citing an analysis by BlackRock Inc.
CDOs package pools of assets such as mortgage bonds or high-yield company loans into new securities with varying risks.
Read more at: BusinessWeek
Policing Private Equity
Portfolio.com reports that regulators, subsumed with banks, hedge funds, and trading, have gone easy on private equity. Disciplining these funds is best left to institutional investors, anyway.
The private equity business is one of a handful of segments of the financial markets that isn’t emerging as a major focus for reform among Washington policymakers. True, there has been some discussion about taxing the industry’s profits at a higher rate, which is moving forward in the House in a proposal by Senator Carl Levin and Senator Max Baucus. But compared with the historic bank regulation that the Senate passed on Thursday, private equity funds and their managers have escaped the populist storm relatively unscathed, even if they will spend much of the next five years trying to refinance hundreds of billions of dollars of debt in a more difficult environment.
The probable reason for this relative immunity is that in their dealings with Wall Street investment banks, it’s more probable that it was the private equity world that took advantage of investment banks like Citigroup or Morgan Stanley rather than the other way around.
Indeed, within investment-banking circles, the biggest buyout shops—Blackstone, KKR, and Apollo—earned a reputation for playing one investment bank against another in quest of the cheapest and largest financing packages. At one point during the height of the frenzy, bankers at Citigroup were trying to find ways to finance a $85 billion buyout, several times the largest such deal ever done, on behalf of one of its clients. “We might have temporarily lost our minds,” admitted one of the bankers involved, after the fact. “But at the time, we knew we couldn’t afford to lose the client’s loyalty.”
Still, just because the private equity business seems to have manipulated Wall Street rather than the other way around doesn’t mean that it should be immune to scrutiny. True, its investors are sophisticated entities—pension funds, college and university endowments, and foundations. Many of them may have been encouraged by the success of early players like Yale’s David Swenson (and the latter’s loud cheerleading for such alternative asset classes) into committing extremely large chunks of their portfolios to the relatively illiquid private equity arena. The appeal was easy enough to understand. At the height of the private equity boom, top quartile firms generated an annualized return of 39 percent, according to the Private Equity Council, an industry group.
A survey last year by Prequin calculated that two out of every five of the largest endowments have allowed or encouraged their allocations to private equity to exceed their targets, signaling a dangerous lack of discipline on the part of those institutions. But that wasn’t because Wall Street misinformed or concealed the true nature of the risks or return characteristics of private equity from these investors, as numerous legal actions now claim was how Main Street homeowners ended up refinancing their homes with toxic mortgages or German banks invested in CDOs.
On the contrary, the terms of the deals being struck by buyout funds at the height of the bubble often were spelled out in newspaper headlines. It was all too clear that these often involved miniscule amounts of equity investment and massive debt loads.
It’s not surprising that those chickens are coming home to roost. In March, Moody’s Investors Service released a much-buzzed-about report, one that aroused the ire of the private equity world from the very first sentence: “Nearly half of U.S. nonfinancial corporates that defaulted in 2009 had private equity sponsors.”
In other words, those debt loads were making it difficult for the companies that had been buyout targets to function and repay that debt in a recessionary environment. One after another well-known companies filed for bankruptcy protection, staggering under the burden of debt loads applied to their operations by new private equity purchasers: Linens ‘n Things, Reader’s Digest Association, Tribune Co. (the publisher of Chicago’s broadsheet daily newspaper.) The bigger the buyout, the more perilous the outcome, Moody’s said, and the debt rating agency pointed to high correlations between low-rated debt issues and defaults, and between buyout-backed companies and low-rated debt issues.
The Moody’s report, coupled with others from the Boston Consulting Group and Standard & Poor’s—all suggesting that the pain isn’t yet at an end—have been met with furious ripostes from those inside the buyout world. The issue under debate appears to be the precise definition of a default: Moody’s lumps negotiated settlements and prepackaged bankruptcies into the default category, while other studies (including one sponsored by the Private Equity Council) argue that it’s inappropriate to include transactions in which bondholders received significant “recovery” levels on their investments.
That strikes StreetWise as debating over how many angels are capable of dancing a creditable flamenco atop the proverbial head of a pin. Rather than debating whether recovering 80 cents on the dollar means a bond didn’t technically default, the private equity industry might well start spending some time revisiting its basic model and questioning its relationships not with Wall Street (which will always bend over backwards to accommodate such lucrative clients) but with their own investors and the management of their portfolio companies they acquire.
CKE Restaurants to Be Acquired by Apollo Affiliate
April 27, 2010 by Jim Coen
Filed under Franchise News
Bloomberg BusinessWeek reports that CKE Restaurants Inc., operator of the Carl’s Jr. and Hardee’s fast-food chains, said it will sell itself to an affiliate of Apollo Management LP for $12.55 a share in cash, or about $694 million.
CKE terminated a previous merger agreement with affiliates of Thomas H. Lee Partners LP, it said in a statement today. THL Partners, which owns a stake in Dunkin’ Brands Inc., had offered $11.05 a share.
CKE said on April 7 it had received a rival proposal from a then-unidentified bidder that may top the bid it had accepted from THL Partners in February. The acquisition by Apollo affiliate Columbia Lake Acquisition Holdings Inc. shows private equity firms are interested in restaurant chains because of their relatively low debt and good cash flow, said R.J. Hottovy, a restaurant analyst at Chicago-based Morningstar Inc.
Apollo spokesman Charles Zehren declined to comment. CKE spokeswoman Beth Mansfield and THL Partners spokesman Matt Benson didn’t return messages left after-hours at their offices.
CKE has 3,141 restaurants in 42 states and 14 countries, including 1,224 Carl’s Jr. restaurants and 1,905 Hardee’s sites. Founder Carl Karcher borrowed $311 to buy a Los Angeles hot-dog cart in 1941 and became a pioneer in the industry, introducing salad bars, char-broiled chicken-breast sandwiches and self- service beverage stations. He died in 2008.
Related reading at DDIFO.org: CKE Reastaurants Says New Takeover Bid is Better
CKE Restaurants Says New Takeover Bid Is Better
April 25, 2010 by Jim Coen
Filed under Franchise News
The New York Times reports that CKE Restaurants, the operator of Carl’s Jr. and Hardee’s restaurants said Tuesday that a rival buyout offer from an unnamed bidder was better than the one it had from a private equity firm, The Associated Press reported.
While the company didn’t name the mystery bidder, DealBook reported this month that the unnamed suitor was Apollo Management.
The news sent shares of CKE Restaurants up 82 cents, or 6.8 percent, to $12.81 in midday trading.
CKE said the $12.55 per share each stockholder would receive from the bidder was superior to a prior offer from Thomas H. Lee Partners, the buyout shop that was part of a consortium that bought Dunkin’ Brands in 2006.
CKE accepted Lee Partners’ offer of $11.05 a share in February. That offer includes about $619 million in cash and approximately $309 million in debt. But CKE said that it notified Lee Partners on Monday about the rival bid and that it planned to terminate its existing agreement based on what it felt was a superior proposal.
CKE is obligated by its existing deal with Lee Partners to talk to the firm for four business days about the offers in case Lee Partners wants to revise its bid. If a new agreement isn’t reached, CKE will send Lee Partners a notice that it is ending the existing deal in favor of the other bid.
Other realted reading at DDIFO.org: CKE Has Better Offer From Apollo and Other Buyers Interested in CKE and Carl’s Jr. Owner CKE Bought by Thomas Lee Partners
CKE Restaurants has Better takeover offer from Apollo
April 12, 2010 by Jim Coen
Filed under Franchise News
The operator of Carl’s Jr. and Hardee’s restaurants said Wednesday it may have received a better takeover offer than the one it already has from a private equity firm.
CKE Restaurants Inc. said an unnamed party submitted a bid that may be superior to its current deal with Thomas H. Lee Partners, a Boston firm that’s among a trio of investment firms that bought Dunkin’ Brands Inc. in 2006.
The rival buyout offer received by CKE Restaurants Inc. this week was from private-equity firm Apollo Management, Reuters reported Thursday.
CKE, the Carpinteria, Calif.-based parent to the Carl’s Jr. and Hardee’s chains, has until April 27 to evaluate the new offer.
On Wednesday, CKE said it had received a buyout offer that may be better than the bid made in February by private-equity firm Thomas H. Lee Partners LP to buy the company for $928 million. THL’s offer includes the assumption of $309 million in debt and a per-share cash price of $11.05.
Read more: Nation’s Restaurant News
The news sent the company’s stock up 75 cents, or 7 percent, to $11.83 in premarket trading. The shares have traded between $7.60 and $11.57 over the last year.
CKE accepted Lee’s offer in February, which includes about $619 million in cash and approximately $309 million in debt.
Under terms of the deal, CKE shareholders would receive $11.05 in cash for each share they own.
CKE did not disclose many specifics about the new proposal, but said it can keep talking with the bidder until April 27 because of terms in the agreement with Thomas H. Lee. The bidder did not disclose how they would pay for the transaction.
CKE was allowed to seek alternative offers until Tuesday. Back in February the restaurant operator, based in Carpinteria, Calif., said it wouldn’t disclose any information related to its talks with other potential buyers — unless its board decided that a superior bid had been received.
Representatives for CKE and Thomas H. Lee couldn’t immediately be reached for a comment.
Business for CKE and many of its competitors slowed during the recession and kept some of its most loyal customers — young men — away from its restaurants.
CKE reported late last month that its fourth-quarter profit grew, but it was mostly due to a sizable tax benefit. The restaurant operator’s revenue fell nearly 5 percent during the quarter, while sales at stores open at least a year dropped 6 percent. This figure is considered a key performance indicator because it measures growth from existing locations rather than newly opened ones.
For the full year, CKE’s profit climbed 30 percent as annual revenue slipped 4 percent.
The company operates and franchises 3,141 restaurants in 42 states.
Other related reading at DDIFO.org: Carl’s Jr. Owner CKE Bought by Thomas H. Lee Partners and Other buyers interested in CKE?
IPO Age Dawning
Signs are positive that initial public offerings could be getting ready for a comeback. But is the activity just a mirage, or will health return to one of the most important functions of the market?
Kent Bernhard of Portfolio.com reports that you ask just about any venture capitalist in California’s Silicon Valley about the market for taking companies public, and they’ll tell you it’s been horrible for nearly a decade and needs to improve for them to make money and create a healthy environment for investing in new companies.
But signs of a thaw are evident, and venture capitalists and their cousins at private equity firms are looking to cash out.
“There’s at least 100 to 150 companies out there that could or should be able to go public right now,” said Dixon Doll, co-founder of DCM, which manages about $2 billion and invests in startup companies around the world. “I think there’s a tremendous amount of activity in the Valley at this moment with boards of venture-backed companies meeting with investment bankers to have discussions about whether to go public and how to go public and all those kinds of things.”
Doll himself is a three-decade veteran of the venture capital industry, and says he hopes for a better IPO market in the next few years, but isn’t predicting an immediate comeback.
Still, there are some positive signs.
In the Silicon Valley, a raft of venture-backed companies are testing the waters. Among them: solar firm Solyndra Inc., which is seeking $300 million; Codexis Inc., $100 million; electric sports-car maker Tesla Motors Inc., $100 million; Telegent Systems, $250 million; Force10 Networks, $143.8 million; Telenav Inc., $75 million; and Beceem Communications Inc., $100 million.
According to research firm Renaissance Capital, there were 27 IPOs in the United States from January through March of this year, compared to a single public offering in the same period last year. That’s a nice increase, and if the companies in the pipeline are successful, look for more of the same.
“I expect our cycle to rise over the next five to 10 years since it’s been in the tank for about 10 years,” Tim Draper of Draper Fisher Jurvetson said in an email exchange with Portfolio.com.
The Wall Street Journal reports that two of the most aggressive of the private equity company buyers of the boom a few years back are getting ready to take some of their companies public.
Bain Capital and KKR & Co. are getting ready to take three of their biggest acquisitions of the past few years public. If all three go forward as planned, retailer Toys R Us Inc., hospital chain HCA Inc., and NXP Semiconductors will all be public companies again soon.
Sources tell the Journal that the public offerings could be priced in the next couple months if the stock market remains on the ascent, or at least stable.
And that stability, said one top venture capitalist, is key to growing a healthy IPO market out of the current anemic one.
Said Erik Straser, partner at venture firm Mohr Davidow: “My read on it is if the market gets stable enough to let people get over the safety of inaction, then the next question is, ‘If I’m going to leave defense, where am I going on offense?’ IPOs are a natural way for them to do that.”
Read more: Portfolio.com
Papa Murphy’s Sold to Lee Equity Partners
VANCOUVER, Wash. – April 1, 2010 – New York-based private equity firm Lee Equity Partners has signed a definitive agreement to purchase the nearly 1,200 unit Papa Murphy’s Take ’N’ Bake pizza chain from its current majority owner, Charlesbank Capital Partners. Terms of the deal are not being disclosed. Lee Equity Partners is one of consortium of global private equity firms including Bain Capital Partners LLC, The Carlyle Group that own Dunkin’ Brands, Inc.
Papa Murphy’s said that the transaction will position the company for its next phase of growth, as it continues to seek new franchise owners and open locations, primarily in the Southwestern and Southeastern United States. The deal is expected to close in the second quarter of 2010.
Since Papa Murphy’s recapitalization by Charlesbank in 2004, the take ‘n’ bake pizza pioneer has seen its domestic system-wide sales increase by more than 63%, according to John Barr, Chairman and CEO of Papa Murphy’s. “Charlesbank has been a great value-added partner, and I credit much of our strong position in the current marketplace to their support over the years,” said Mr. Barr. “This new chapter with Lee Equity will undoubtedly benefit all of the brand’s stakeholders, including our franchisees, employees and vendors. I look forward to working together to provide an even stronger foundation for expansion and profitable growth.”
“John Barr and the management team have done a terrific job developing the company internally and fortifying its industry leadership position and strong franchise network,” said Michael Eisenson, Charlesbank CEO. “This has been a rewarding investment for us, and we look forward to a very successful partnership between the company and Lee Equity Partners as the management team continues to execute their strategy for growth.”
Thomas H. Lee, President of Lee Equity Partners, said that his organization was impressed with Papa Murphy’s potential for future growth. “This is an outstanding brand with a strong management team. We are very excited about the expansion possibilities into areas of the country where they have little or no presence today.”
Mr. Lee has been involved in a number of high growth consumer-oriented acquisitions, including Snapple Beverage Corp., General Nutrition Companies, PETCO Animal Supplies, Inc., Ghirardelli Holdings Corp., Banana Boat, and Sterling Jewelers, Inc., among others.
Carl’s Jr. Owner CKE Bought by Thomas H. Lee Partners
February 26, 2010 by Jim Coen
Filed under Food Service News
BusinessWeek reports that Thomas H. Lee Partners LP agreed to acquire CKE Restaurants Inc., owner of the Carl’s Jr. and Hardee’s fast-food chains, for about $619 million in cash. The shares jumped the most in almost nine years in New York trading.
CKE investors will receive $11.05 in cash for each share of CKE common stock they hold, the companies said today in a statement. That’s 24 percent more than yesterday’s closing price of $8.91. Thomas H. Lee also agreed to assume about $309 million in debt for Carpinteria, California-based CKE.
“It’s a fantastic company that produces a lot of free cash flow,” said Mark Smith, a restaurant analyst with Feltl & Co. in Minneapolis. He recommends holding the stock, which had climbed 28 percent in the past year before today. “They weren’t out looking and begging for a buyer,” he said.
CKE had free cash flow — cash flow from operating activities minus capital spending — of $11.5 million in the third quarter, more than double the average of 50 restaurant companies, according to Bloomberg data.
Sales at CKE restaurants open at least a year fell 6 percent in the quarter ended Jan. 25, as unemployment remained high and competitors lowered hamburger prices, the company said this month.
The stock jumped $2.25, or 25 percent, to $11.16 at 10:30 a.m. in New York Stock Exchange composite trading after reaching $11.24, for the largest intraday gain since April 2001.
Industry Pioneer
CKE has 3,147 restaurants in 42 states and 14 countries, including 1,221 Carl’s Jr. restaurants and 1,913 Hardee’s. Founder Carl Karcher borrowed $311 to buy a Los Angeles hot-dog cart in 1941 and became a pioneer in the industry, introducing salad bars, char-broiled chicken-breast sandwiches and self- service beverage stations. He died in 2008.
Thomas H. Lee, which also owns a stake in Dunkin’ Brands Inc., operator of the Dunkin’ Donuts and Baskin Robbins chains, has raised $22 billion of equity since its founding in 1974. The Boston-based firm, also known as THL Partners after founder Thomas H. Lee left the company he founded, has invested in more than 100 businesses with an aggregate purchase price of more than $125 billion.
CKE has through April 6 to solicit better offers from third parties, according to the statement. The deal values CKE at about 12.5 times earnings over the next year, below the 14 times average of other fast-food restaurants, Smith said. Barring other bids, the deal should close in the second quarter of this year, the companies said.
UBS Investment Bank and law firm Stradling, Yocca, Carlson & Rauth are advising CKE. Bank of America Merrill Lynch and law firm Ropes & Gray are advising THL.
