Archive for April, 2010

HCA Could Have $3 Billion IPO, 4 Years After KKR & Bain Buyout

Sunday, April 11th, 2010


Most recent bond prospectus for HCA…great read.

HCA Prospectus

Short video clip describing HCA IPO and roadshow process.

[youtube]http://www.youtube.com/watch?v=hZ9VUSmUoyo&feature=channel[/youtube]

Four years after its buyout, HCA, the largest hospital chain in the United States is preparing for an IPO that could raise as much as $3 billion for KKR and its investors.  HCA has over 160 hospitals and 105 outpatient-surgery clinics in 20 states and England.  The IPO would help the firm pay down some of its $26 billion in debt.  The company is very well positioned to benefit from health care reform.  According to Analysts, this specific IPO would be the largest in the U.S. since March 2008, when Visa Inc. raised almost $20 billion…A takeover of a public company of more than $6 billion including debt hasn’t been announced since 2007.  HCA has fared much better than other mega-buyouts from 2006/2007, and is only levered at 4.8x trailing EBITDA.

According to Bloomberg, “HCA Inc., the hospital chain bought four years ago in a $33 billion leveraged buyout led by KKR & Co. and Bain Capital LLC, is preparing an initial public offering that may raise $3 billion, said two people with knowledge of the matter.

HCA plans to interview banks to underwrite the sale in the coming weeks, according to the people, who asked not to be identified because the information isn’t public. The sale, slated for this year, may fetch $2.5 billion to $3 billion, the people said. HCA’s owners, which include Bank of America Corp. and Tennessee’s Frist family, may seek $4 billion, said another person familiar with the plans.

The stock offering would be the biggest U.S. IPO in two years and help HCA pay off debt, the people said. The hospital operator may profit from the health-care legislation President Barack Obama signed into law on March 23 that provides for coverage for millions of uninsured patients, said Sheryl Skolnick, an analyst at CRT Capital Group LLC in Stamford, Connecticut.

HCA is “extremely well-positioned to benefit from health reform because their hospitals tend to be concentrated in significant markets” including Denver, Dallas, Houston, Kansas City, Missouri, and Salt Lake City, Skolnick said yesterday in a telephone interview. “Health reform was very important to this decision.”

Kristi Huller, a spokeswoman for KKR, and Alex Stanton, a Bain spokesman, declined to comment, as did Jerry Dubrowski, a Bank of America spokesman. Ed Fishbough, a spokesman for HCA, didn’t immediately respond to a phone call and e-mail seeking comment.

Buyout Surge

Private-equity firms spent $2 trillion, most of it borrowed, to buy companies ranging from Hilton Hotels Corp. to Clear Channel Communications Inc. in the leveraged-buyout boom that ended in 2007 and are now seeking to cut that debt before it matures.

U.S. IPO investors have been leery of companies backed by private equity this year. In the biggest offering so far, Bain’s Sensata Technologies Holding NV sold $569 million of shares last month at the low end of its estimated price range. In February, Blackstone Group LP’s Graham Packaging Co. and CCMP Capital Advisors LLC’s Generac Holdings Inc. were forced to cut the size of their offerings.

HCA may file for the IPO with the U.S. Securities and Exchange Commission as early as next month, said one of the people.

The IPO would be the largest in the U.S. since March 2008, when Visa Inc. raised almost $20 billion. HCA would be the biggest IPO of a private-equity backed company in the U.S. since at least 2000, according to Greenwich, Connecticut-based Renaissance Capital LLC, which has followed IPOs since 1991.

Debt Load

HCA’s owners put up about $5.3 billion to buy the company, according to a regulatory filing, funding the rest with loans from banks including Bank of America, Merrill Lynch & Co., JPMorgan Chase & Co. and Citigroup Inc. The IPO would lower HCA’s debt load rather than allowing owners to reduce their stakes, said the people.

The hospital chain’s purchase in 2006 shattered the record for the largest leveraged buyout, held since 1989 by KKR’s acquisition of RJR Nabisco Inc. HCA’s record was eclipsed by Blackstone’s acquisition of Equity Office Properties Trust and again by the 2007 takeover of Energy Future Holdings Corp., by KKR and TPG Inc., for $43 billion including debt.

Later that year, the global credit contraction cut off the supply of loans necessary to arrange the largest LBOs. A takeover of a public company of more than $6 billion including debt hasn’t been announced since 2007.

$25.7 Billion Debt

HCA, the largest U.S. hospital operator, had about $25.7 billion of debt as of Dec. 31, about 4.8 times its earnings before interest, taxes, depreciation and amortization, even before HCA’s owners tapped credit lines in January to pay themselves a $1.75 billion dividend. Tenet Healthcare Corp.’s ratio was 4.4 and LifePoint Hospitals Inc.’s was 2.85 at year- end, according to data compiled by Bloomberg.

Health-care companies have fared better than the average private-equity investment during the economic decline. KKR said in February that its holding in the company had gained as much as 90 percent in value as of Dec. 31, while stakes in Energy Future Holdings Corp. and First Data Corp. were worth less than their initial cost.

Hospitals will probably be “net winners” in the health- care legislation, said Adam Feinstein, a New York-based analyst at Barclays Capital, in a March 26 note to investors. HCA, Dallas-based Tenet and Brentwood, Tennessee-based LifePoint may gain because the legislation will reduce hospitals’ losses from providing charity care to the poor and uncollectible bills.

Frist Family

HCA has 163 hospitals and 105 outpatient-surgery clinics in 20 states and England, according to the company’s Web site.

The company was founded in 1968, when Nashville physician Thomas Frist Sr., and his son, Thomas Frist Jr., and Jack Massey built a hospital there and formed Hospital Corp. of America. By 1987, the company had grown to operate 463 hospitals, according to the company’s Web site. Thomas Frist Sr. is also the father of Bill Frist, a physician and the former Senate majority leader.

HCA went private in a $5.1 billion leveraged buyout in 1989, then went public again in 1992, according to the company Web site. In 1994, HCA merged with Louisville, Kentucky-based Columbia Hospital Corp. In the mid-1990s the company, then called Columbia/HCA Healthcare Corp., operated 350 hospitals, 145 outpatient clinics and 550 home-care agencies, according to the company.

Overbilling Settlement

In December 2000, HCA agreed to pay $840 million in criminal and civil penalties to settle U.S. claims that it overbilled states and the federal government for health-care costs. It was the largest government fraud settlement in U.S. history at the time, according to a U.S. Justice Department news release on Dec. 14, 2000.

A credit-market rally has helped HCA extend maturities on some of its debt. HCA has sold $4.46 billion of bonds since February 2009 in a bid to repay bank debt and delay maturities, according to data compiled by Bloomberg. The company still has about $11 billion coming due over the next three years, according to Bloomberg data. It is also negotiating with lenders to amend the terms of a bank loan.

HCA offered earlier this month to pay an increased interest rate to lengthen maturities on $1 billion of bank debt, according to two people familiar with the matter. The amendment would allow HCA to move part of the money due under its term loan B to 2017 from 2013. Even after the refinancing and debt pay downs, the company will still have to access the “capital markets to address remaining maturities,” said Moody’s Investors Service Inc. in a note last month.

“It will be difficult for the company to meaningfully reduce the amount of debt outstanding through operations due to limited free cash flow generation,” Moody’s said.”

Here is an article from 4 years ago by the NY Times describing the mega-buyout:

“HCA, the nation’s largest for-profit hospital operator, said today that it had agreed to be acquired by consortium of private investors for about $21 billion. The investors will also take on about $11.7 billion of HCA’s debt.
Skip to next paragraph

The overall deal, which the company valued at about $33 billion, would rank as the largest leveraged buyout in history, eclipsing the $31 billion takeover of RJR Nabisco in 1989 by Kohlberg Kravis Roberts & Company.

The group of buyers is led by the family of Senator Bill Frist, the Senate majority leader. His father, Thomas Frist Sr., and his brother, Thomas F. Frist Jr., founded HCA.

The other investors are Bain Capital, Kohlberg Kravis Roberts and the private equity arm of Merrill Lynch.

The deal appears to be driven by trends both on Wall Street and in the health care industry. For one thing, the private equity business — in which investment companies pool capital from investors in order to buy companies and then resell them or take them public — is swimming in cash. And private equity firms are eager to invest in a company like HCA, which generates a lot of revenue and, judging by its stock price, is seen as undervalued by investors.

Like many other for-profit hospital companies, HCA has seen its stock perform poorly in recent years. The whole industry has struggled with increasing amounts of bad debt, as more people fail to pay their bills because they do not have sufficient health insurance or any coverage.

Separately, various private equity firms have made a number of huge deals recently: Univision for $12.3 billion in June; $22 billion for Kinder Morgan in May; General Motors’ finance unit, GMAC, for as much as $14 billion in April.

Earlier this month, the Blackstone Group said it had lined up $15.6 billion in commitments for its latest buyout pool, forming the world’s largest private equity fund.

HCA was taken private once before, in the late 1980’s by the company’s management, which at the time thought it was undervalued. The move turned out to be a success, and HCA went public again a few years later.

Today’s deal promises to generate large fees for Wall Street bankers and lawyers, who have been toiling away on the transaction for months. Credit Suisse, Morgan Stanley and Shearman & Sterling are advising HCA; Merrill, Bank of America Corporation, Citigroup Inc., J. P. Morgan Chase and Simpson Thacher & Bartlett are financing and advising the buying group.

HCA is the nation’s largest for-profit hospital chain, with 2005 revenues of roughly $25 billion. Based in Nashville, Tenn., the company operates about 180 hospitals and nearly 100 surgery centers.

After merging with Columbia Hospital Corporation in 1994, HCA became the subject of a sweeping federal Medicare fraud investigation; it agreed to pay $1.7 billion to settle the matter. Thomas Frist Jr., who had left HCA’s management before the fraud charges arose, eventually returned as chief executive in 1997. He stepped down as chairman in 2002, but he remains on the company’s board of directors.

Senator Frist’s ties to the company have drawn criticism over the years, as he has been active in the Senate on a variety of health-care initiatives that have the potential to affect the large hospital company. Last fall, the Securities and Exchange Commission began an investigation into his decision to sell stock, once estimated to be worth more than $10 million, which was held in a trust.

Mr. Frist sold the stock in June 2005, just as the price of HCA stock peaked and shortly before it fell the following month; the sale was disclosed in September. He has said that the timing of the sale was a coincidence, the result of a decision to divest his holdings in the company, and that he is cooperating with the investigation.

Under the terms of today’s deal, the consortium of investors would pay $51 a share for HCA’s outstanding common stock, roughly 15 percent more than the company’s trading price early last week, when word spread that the negotiations had faltered. Today, HCA’s stock rose $1.61, or 3.4 percent, to close at $49.48 on the New York Stock Exchange.

The investor consortium is expected to borrow about $15 billion to finance the deal. But with the high-yield bond market tightening, raising that amount could be a challenge.

There is also the possibility that another group could emerge with a rival offer. HCA has included a provision in its deal with the investor consortium that allows it to actively seek a higher offer. Firms like the Blackstone Group and the Apollo Group, as well as rival hospital operators, could try to bid.”

Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.


Germany Agrees to Greek Bailout, Finally…As $27 Billion of Greek Loans Need to Be Refinanced

Sunday, April 11th, 2010

April 1, 2010: After months of tribulation and back and forth discussions, Germany admits that it is prepared to give Greece loans at below market rates.  Germany has been criticized for allowing the IMF, a U.S. backed institution to bail out Greece, instead of having the European Union take care of its own constituent.  Greek bonds have been trading at 400+ bps over the rate on German bonds, signaling a 17-20% chance of default.  Many feel that the bonds will not default, including PIMCO, and thus represent a great investment.  In this newest proposal, Germany would work with the IMF to give loans at below market rates, a lifeline for the nation.  Europe will provide more than 50% of the loans.  Greece needs to refinance $27 billion in loans within the next 2 months.

According to Bloomberg, “Germany is prepared to give Greece loans at below-market interest rates, dropping its opposition to subsidies as European finance ministers meet to discuss the terms of a lifeline for the debt-stricken nation, a European government official said.


The loans would be priced above the rate charged by the International Monetary Fund, which would also participate in an EU-led rescue, said the person, who spoke on condition of anonymity. Such an arrangement would satisfy German demands that Greece shouldn’t be given subsidized loans, the person said. EU finance ministers will hold a press conference after a teleconference that starts at 2 p.m. in Brussels today.

German resistance to subsidized loans threatened to hold up efforts to agree on a rescue package for Greece, whose bonds plunged last week. With German Chancellor Angela Merkel balking at the use of taxpayers’ funds, her government has said that the EU should stick to a March 25 agreement that credit to Greece should be at “non-concessional” rates.

“They have to be given some help from Europe or the IMF at concessional rates,” billionaire investors George Soros said in an interview on Bloomberg Radio yesterday in Cambridge, England. “It is a make or break time for the euro and it’s a question whether the political will to hold Europe together is there or not.”

European Commission spokesman Fabio Pirotta couldn’t given an exact time for the press briefing by the eurogroup, which also includes European Central Bank President Jean-Claude Trichet. Ministers may today agree to the formula for calculating the loans, the European government official said.

Terms of Agreement

Under the terms of the March accord, Europe would provide more than half the loans and the IMF the rest, which would be triggered if Greece runs out of fund-raising options. UBS AG economists estimate Greece will need to seek emergency funding to make bond payments and cover debt refinancing of more than 20 billion euros ($27 billion) in the next two months.

The yield on Greek 10-year bonds surged 60 basis points this past week, driving it to a record 7.364 percent on April 8. Any IMF loans to Greece may cost around 3.26 percent. The premium investors demand to buy Greek 10-year bonds instead of German bunds jumped to 442 basis points April 8, before sliding to 398 basis points a day later.

The euro, which has dropped 6 percent against the dollar this year, rose 1 percent to $1.35 on April 9 as speculation about an aid package mounted.

German Resistance

Overcoming German resistance to subsidized loans came amid mounting speculation that that a bailout was imminent. UBS says it could come this weekend as Fitch Ratings cut Greece’s debt rating yesterday to BBB-, just one level above junk. Greek Prime Minister George Papandreou has argued that he needed below- market borrowing costs to cut EU’s-biggest budget deficit.

Papaconstantinou said April 9 that Greece still wasn’t seeking EU aid and would make good on its pledge to trim its deficit from about 13 percent last year, more than 4 times the EU limit, to 8.7 percent this year.

Greece needs to raise 11.6 billion euros to cover debt that is maturing before the end of May and plans to sell bonds to U.S. investors in the coming weeks. The country’s debt agency said yesterday it would offer 1.2 billion euros of six-month and one-year notes on April 12.

Greece’s long-term foreign and local currency issuer default ratings were on April 9 cut two levels to BBB-, the same level as Bulgaria and Panama, from BBB+ by Fitch Ratings. The outlook is negative, Fitch said, citing delays in agreeing to an aid package.

Confidence ‘Undermined’

“The lack of clarity regarding the mechanism for timely external financial support may have hindered Greece’s access to market finance at affordable cost and hence further undermined confidence in the capacity of the government to meet its fiscal targets,” Fitch said in an e-mailed statement.

The Athens benchmark stock index rose for the first day in four on April 9 amid speculation that an aid package would soon be agreed. It fell 5 percent this week.

EU leaders, including French President Nicolas Sarkozy and the Herman Van Rompuy, president of the 27-nation bloc, expressed their readiness to provide aid two days ago.

“A support plan has been agreed and we are ready to activate at any moment to come to the aid of Greece,” Sarkozy said.”

BNC Bancorp Buys Beach First, South Carolina Based Lender, $585 Million in Assets

Sunday, April 11th, 2010

The most recent fatality in the commercial banking sector was a South Carolina based bank, the 42nd of the year.  Beach First had $585 million in assets and cost the FDIC fund over $100 million.  Defaults on residential and commercial loans are still driving up bank defaults.  Defaults may reach 140 for 2008 and 2009.

According to Bloomberg,  BNC Bancorp, the North Carolina- based lender with $1.6 billion in assets, purchased a Myrtle Beach, South Carolina bank as the number of U.S. bank failures this year climbed to 42.

Federal bank regulators closed Beach First National Bank yesterday and named the Federal Deposit Insurance Corp. as receiver, according to a statement on the FDIC Web site. BNC’s lender, Bank of North Carolina, purchased Beach First and most of its $585.1 million in assets. The collapse cost the FDIC’s deposit-insurance fund $130.3 million.

“Beach First’s excellent customer base was a significant attraction to our company in considering this transaction,” BNC Bancorp Chief Executive Officer W. Swope Montgomery Jr. said in a statement. Bank of North Carolina picks up seven branches in the transaction.

Lenders are collapsing amid losses on residential and commercial real estate loans. U.S. “problem” banks climbed to the highest level since 1992 in the fourth quarter and FDIC Chairman Sheila Bair warned Feb. 23 that the pace of failures may exceed last year’s total of 140.

BNC counts as a board member Charles T. Hagan, husband of Senator Kay Hagan, a North Carolina Democrat. Beach First is the only South Carolina bank to have failed since Oct. 1 2000, the FDIC said.

Haliburton Buying Boots & Coots for $240 million, Cash & Stock Deal

Sunday, April 11th, 2010

Haliburton, a leading services company competing with Schlumberger recently announced the acquisition of Boots & Coots, after the founder of the firm passed away late March. Edward “Coots” Matthews was a phenomenal entrepreneur who died working at the age of 86. The deal was recommended by the company’s board of directors, to take advantage of the fact that Boots & Coots would need new leadership. Boots & Coots provides a suite of integrated pressure control and related services to onshore and offshore oil and gas exploration and development companies worldwide.

Boots & Coots may see an influx of business along with other firms in the space because of Obama’s recent approval of offshore drilling for oil.

According to Mr. Shankar of Bloomberg, “Halliburton Co. agreed to buy Boots & Coots Inc. for about $240.4 million in stock and cash, adding equipment and services to fight oil-well fires.

Boots & Coots holders will receive $1.73 in cash and $1.27 in Halliburton stock per share, Halliburton said in a statement yesterday. The combined price, $3, is 28 percent more than Boots & Coots’ closing price yesterday. Both companies are based in Houston.

The addition of Boots & Coots will allow Halliburton to offer a more complete suite of services to customers, said Marc Edwards, a senior vice president. Halliburton is the world’s second-largest oil-field services company after Schlumberger Ltd.

Edward “Coots” Matthews, who died on March 31 at 86, founded the company in 1978 along with Asger “Boots” Hansen. For 20 years prior to that, they had worked with Red Adair, whose skill at battling oil-well fires was portrayed in the 1968 movie “Hellfighters,” starring John Wayne as Adair.

Both Matthews and Hansen were involved in fighting well- known oil-well blowouts, including the “Devil’s Cigarette Lighter” in Gassil Touil, Algeria, in 1961 and another at Lake Maracaibo in 1991. They also extinguished the fires from 700 oil wells in Kuwait, blazes set by retreating Iraqi troops near the end of the first Gulf War in 1991, according to the company.

For 2009, Boots & Coots reported net income of $6 million, or 8 cents a share, on revenue of $195.1 million.

Halliburton said the boards of both companies had approved the transaction and it will close this summer.

Boots & Coots had 80.13 million shares outstanding as of March 2, according to Bloomberg data. The stock fell 3 cents to $2.35 yesterday. It’s up 42 percent for the year.

Halliburton fell 9 cents to $31.57 in New York Stock Exchange composite trading yesterday. The shares have climbed 4.9 percent this year.”

Kellogg University Guide To Management Consulting, Case Analysis, and Frameworks

Sunday, April 11th, 2010

Management consulting is a very difficult field to enter.  I read this guide today from Kellogg and thought it would be helpful to LA readers brushing up for the interviews.  Next year’s recruiting season will be very strong.  Best of luck to you. ~Leverage Academy

Kellogg Consulting Club Case Book – Version 2.0


Peabody Increases Offer for Macarthur Coal to $3.6 Billion After Rejected $3.3 Billion Bid, Bidding War with Noble – Research Attached

Tuesday, April 6th, 2010

Regional Thermal Coal Sector

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The coal market is heating up in Asia, and North American companies are struggling to capture some of the growth in the region. Australian companies like Macarthur Coal have been able to capitalize on the Chinese need for natural resources. Peabody has entered a bidding war with Noble Energy for Macarthur Coal.  The company increased its offer by $300 million from $3.27 to $3.57 billion.  Analysts are waiting for the Macarthur’s shareholder meeting on April 12th…

According to Businessweek, “Peabody Energy Corp., the biggest U.S. coal company, increased its takeover offer for Macarthur Coal Ltd. by 8 percent to A$3.56 billion ($3.27 billion) after the Australian company rejected the first bid.

Peabody offered A$14 cash a share, it said in a statement, from A$13. Macarthur, which last traded at A$14.87 before it was halted, last week rejected the initial offer because it didn’t value its expansion plans.

The offer may thwart Noble Group Ltd.’s attempt to become Macarthur’s biggest shareholder in a stock swap for the Hong Kong-based commodity supplier’s Gloucester Coal Ltd. Peabody operates eight mines in Australia’s Queensland and New South Wales states, and is seeking more to feed power stations and steel mills in China, the world’s largest user of coal.

ArcelorMittal, the world’s biggest steelmaker, holds 16.6 percent of Macarthur and South Korea’s Posco owns 8.3 percent, according to data compiled by Bloomberg. Citic Australia Coal Ltd. has 22.4 percent. Peabody is offering alternatives to Macarthur’s three major shareholders should they wish to maintain their holdings in the company.

Macarthur is the world’s biggest supplier of pulverized coal used by steelmakers. Peabody wants Macarthur to delay an April 12 shareholder meeting when investors will vote on the Gloucester and Noble deal.

Separately, Noble backed by China’s $300 billion sovereign wealth fund, moved to secure full ownership of Gloucester by offering A$127 million, or A$12.60 a share, for the 12.3 percent of Gloucester it doesn’t own, Singapore-based Noble said today in a statement. Gloucester, halted from trading in Sydney, last traded on April 1 at A$9.31.”

According to Peabody, “This represents: a 44% premium to A$9.70 per share, the price at which Macarthur agreed to issue shares to Noble Group in relation to the Gloucester takeover offer (and provide board representation);

a 39% premium to A$10.04 per share, the closing share price of Macarthur on 25 February 2010, just prior to the release of the Lonergan Edwards Independent Expert’s Report;

up to a 42% premium to the valuation range for Macarthur determined by the Independent Expert, based on a 100% controlling interest; and

a 22% premium to A$11.48 per share, which was the 30-day volume-weighted average share price through 30 March 2010, when Macarthur announced Peabody’s original proposal.

Peabody has also reduced the conditionality of the proposal. While Peabody continues to offer alternatives to the three major shareholders to retain their original interest in Macarthur, Peabody’s offer is not contingent on their commitment provided the Macarthur Board supports our proposal.

Peabody today repeated its request to the Macarthur Board to delay its 12 April 2010 shareholders’ meeting, so that its shareholders may have the opportunity to consider Peabody’s proposal and realize a cash premium for their shares.

If the 12 April 2010 meeting proceeds and the resolution is approved, it will mean the Gloucester takeover offer and associated transactions with Noble Group are likely to proceed, in which case Noble Group will receive shares at a significant discount to the current price and Peabody’s proposal will lapse. Macarthur shareholders would then lose any potential opportunity to benefit from Peabody’s proposal.

Peabody believes the takeover offer for Gloucester and the associated transactions with Noble Group are not in the best interests of Macarthur shareholders. In particular, Peabody believes:

Macarthur is paying too much for Gloucester. Based on Peabody’s indicative offer price, Macarthur’s offer for Gloucester is valued at nearly A$1 billion. This is more than 40% higher than the mid point of the Independent Expert’s valuation of Gloucester and 26% above the top end of the valuation range determined by the Independent Expert. It would result in Gloucester’s shareholders receiving the majority of the benefits of the transaction;

Noble Group will receive Macarthur shares at a significant discount, becoming its largest shareholder and holding a position of significant influence. Macarthur is proposing to issue shares to Noble Group at A$9.70 per share; Peabody’s proposal is 44% above this price;

While the Independent Expert appointed by Macarthur concluded that the proposed issue of shares to Noble Group was reasonable, it also determined the offer was not fair based on a relative valuation assessment. Peabody believes that Noble Group’s proposed ownership interest in Macarthur would provide a blocking stake, further reducing the likelihood of any future premium offer for Macarthur shares.

Peabody believes its proposal is superior. Peabody’s indicative offer price of A$14.00 per share is more than 12% above the highest value for Macarthur that was determined by the Independent Expert, on a 100% controlling interest basis.

Peabody continues to urge Macarthur’s board to delay the 12 April shareholders meeting to provide its shareholders the opportunity of making an informed choice between proceeding with the Gloucester takeover offer and associated transactions with Noble Group, or endorsing a proposal from Peabody that would deliver a cash premium for their shares. Peabody believes it is in the best position to deliver a superior outcome for Macarthur shareholders.

According to Bloomberg, “Gloucester Coal Ltd., an Australian producer controlled by Noble Group Ltd., said it expects its largest shareholder to make an offer to buy the company.

Noble, which had earlier agreed to swap its stake in Gloucester for shares in Macarthur Coal Ltd., holds 87.7 percent of Gloucester, the Sydney-based company said today in a statement requesting a trading halt.

The bid comes after Peabody Energy Corp., the biggest U.S. coal company, last week offered A$3.3 billion ($3 billion) in cash to buy Macarthur Coal Ltd., the biggest exporter of pulverized coal used by steelmakers. Brisbane-based Macarthur rejected Peabody’s offer saying it fails to value its expansion plans.

Macarthur shares were halted from trading in Sydney today pending the release of an announcement about Peabody’s “interest” in the company, it said.”

Third Point Hedge Fund up 15.3% in First 3 Months of 2010 – Investor Letter Attached

Friday, April 2nd, 2010

According to Marketwatch, “Third Point LLC, a $3 billion hedge fund firm run by Dan Loeb, generated big gains during the first quarter, helping to recoup a lot of the losses suffered during the financial crisis of late 2008 and early 2009.

Third Point Offshore, the firm’s largest fund, was up 7.9% in March, leaving it with a 15.3% gain during the first three months of 2010, according to a recent update sent to investors. MarketWatch obtained a copy of the update.

Third Point Partners, a smaller fund, gained 8.8% in March and 16.6% in the first quarter.

Loeb, who started Third Point in 1995, is best known as an outspoken activist investor, taking big stakes in companies and pushing management to make strategic changes. Check out activist methods.

However, activist positions have never taken up a large portion of Third Point’s portfolio. The firm focuses on value investing and trading around corporate events like reorganizations and mergers and acquisitions.

Third Point Q4 Letter

When the financial crisis struck in 2008, Third Point was hit hard, ending the year down almost 33%. Between June 2008 and March 2009, the firm lost roughly 35%, its biggest drawdown ever. However, the firm rebounded strongly by the end of 2009, generating returns of 38.2%.

Some of Third Point’s gains have come from credit market bets, rather than equity investments. Indeed, by the end of the first quarter of 2010, credit positions made up 64% of the firm’s total exposure, while equity accounted for less than 50%. Hedge funds often have more than 100% exposure because they use leverage, or borrowed money, to magnify their bets.

Third Point’s top three positions at the end of March were in securities of car company Chrysler, auto-parts maker Delphi Corp. and lender CIT Group.

These companies emerged from major bankruptcy reorganizations last year. Such restructurings usually involve giving new equity to debt holders.

CIT emerged from bankruptcy in December and its new shareholders are a who’s-who of the hedge fund industry. Icahn Associates, run by activist investor Carl Icahn, Greenlight Capital, headed by David Einhorn, and Oaktree Capital, run by Howard Marks, are among the company’s top five owners.

Third Point is the 19th-largest CIT shareholder, behind other hedge-fund giants including Paulson & Co., run by John Paulson, Marc Lasry’s Avenue Capital and Eddie Lampert’s ESL Investments, according to FactSet data.

CIT shares jumped 41% in the first quarter of 2010.

Third Point’s other top positions are in securities of PHH Corp. /quotes/comstock/13*!phh/quotes/nls/phh (PHH 24.03, 0.00, 0.00%) , a fleet-management and leasing company, and Dana Holding /quotes/comstock/13*!dan/quotes/nls/dan (DAN 11.78, 0.00, 0.00%) , another auto-parts maker that emerged from bankruptcy in early 2008, according to the hedge fund firm’s recent investor update.

PHH shares soared 46% in the first quarter, while Dana shares climbed 10%.”

According to NYMAG, “Loeb (founder of ThirdPoint) is a focus guy. Each morning at 5:30, he makes his way from his West Village townhouse to a yoga center and puts his feet behind his neck, which Loeb maintains is good for concentration. Still, at the moment, Loeb seems distracted. His hair, which is starting to gray, sticks up in patches. He wears white corduroys. His shirt, with pink and purple stripes, is untucked. “Let’s put it in context,” he says. “It’s never fun to lose a lot of money.” But it’s only $20 million. “We lost a little over 1 percent of the fund,” he points out. He calls for a trash can for his tea bag.

By contrast, the Ross matter seems a bit of fun, a mood elevator. Loeb places the press release on the table. It seems that Loeb and Ross, who has his own private equity fund, find themselves in the same investment. Recently, Loeb purchased $37 million of bankrupt Horizon Natural Resources, a coal company. Ross heads the committee guiding the company through bankruptcy.

In this capacity, Loeb says, warming up, Ross has committed “an egregious example of greed and self-dealing.” From Loeb’s point of view, he overweights his compensation, a mistake Loeb suggests may be a reflex from “the many years you spent generating fees . . . ” Loeb accuses Ross of “double-dipping,” a charge that sent Loeb’s jittery lawyers running for cover. “He’s a bit of a blowhard,” says Loeb, who knew Ross wouldn’t sue. Blowhard, apparently, isn’t entirely pejorative. Loeb admires Ross’s success in the steel industry—“no disrespect,” says Loeb.

Disrespect, though, is kind of a Loeb sideline. Since 1995, Loeb has run Third Point Management, a hedge fund he started with $3.3 million from family and friends. He now has eight other investment personnel and $1.7 billion, which to Loeb’s mind isn’t particularly exceptional these days. At a hedge-fund charity event, he asked for a show of hands: Anyone here not run a $1 billion hedge fund? His fund has returned over 25 percent annually to investors.

Loeb is well known in Hedgeworld for his attacks on what he views as greedy execs who also happen to be depressing shareholder value. Of shares he owns. “The moral-indignation business,” Loeb sometimes calls it.

Hedge-fund guys love to read Loeb’s attacks—“he articulates what people feel,” says one. Usually, the letters accompany Loeb’s government filings. If you buy 5 percent of a public company, you must file with the SEC; Loeb once increased his holdings, at a cost of more than $4 million, just so he could file a letter.

Loeb is proud of his letters, which are thorough, well argued, and filled with clever turns of phrase. (He had a batch prepared for his high-school English teacher.) In a letter to the CEO of Warnaco, he referred to the CEO’s “imminent involuntary extraction.” To the CEO of Bindview Corp., a software company, he wrote of “your seemingly perpetual failure.” He’s gone after Intercept, Potlatch, Penn Virginia. There’s one where he calls the CEO “Chief Value Destroyer,” which he abbreviates CVD. “I’m surprised some CEO hasn’t had him shot,” says one manager.”

Pali Capital Files for Bankruptcy – Bankruptcy Filings Attached

Friday, April 2nd, 2010

Pali Capital, a well known boutique investment bank and underwriter recently filed for bankruptcy after a failed merger attempt.  The firm was founded in 1995 by former MDs at Merrill Lynch.

According to Bloomberg, “Pali Holdings has filed for bankruptcy protection after failing to sell its boutique securities firm, Pali Capital.

Pali’s Chapter 11 petition, filed in federal Bankruptcy Court in Manhattan on Thursday, listed $716,300 in assets and $31.8 million in debts.”

More from Bloomberg:

“Pali Holdings filed the instant Chapter 11 bankruptcy case to obtain protection from its creditors while it continues to liquidate and wind down Pali Capital,” Gerald Burke, a director of Pali Holdings, said in an affidavit filed with the bankruptcy petition.

The privately held company was in talks to sell the brokerage business to ex-Bear Stearns Companies finance chief Samuel Molinaro and had told shareholders it might go out of business without a sale or cash infusion.

The parent company, based in New York, had an estimated loss of $18.3 million in 2009 and said in a Jan. 14 letter to shareholders obtained by Bloomberg News that it could run out of money by the end of February. The broker-dealer Pali Capital, with expertise in derivatives, fixed income, and investment banking, said Feb. 16 that it would begin to wind down operations.

According to the SF Chronicle “When a brokerage fails, the Securities Investor Protection Corp. names a trustee to protect assets and return customers’ cash and securities. When Lehman Brothers Holdings Inc. filed Chapter 11 in 2008, the SIPC appointed lawyer James Giddens as brokerage trustee. The bank’s North American brokerage business and associated real estate were then sold to London-based Barclays Plc for $1.54 billion.

The largest unsecured creditor named in the Pali Holdings filing was Panama-based Mandeville Holding Ventures Co.

Four CEOs

Pali Holdings has had four chief executive officers or co- CEOs in the past 17 months and its chairman stepped down in December. The firm focused on equity and fixed-income sales, trading and research for institutional clients such as money managers and hedge funds. The company had offices in London, San Francisco, Newport Beach, Chicago and five other U.S. locations, according to its Web site.

Pali Holdings received $3 million of “emergency bridge financing” in November and has lost about $40 million in the past two years, according to the company’s letter, signed by directors Kevin Fisher and Burke.

Pursue Alternatives

Shareholders, including former Pali CEO Bradley Reifler, wrote in response that the company should pursue alternatives to a sale, such as a recapitalization. In their undated letter, signed by Reifler, Wolfgang Stolz and John Staddon and also obtained by Bloomberg News, the shareholders requested a special meeting be held to elect a new board.

Molinaro, the former Bear Stearns executive, was helping Braver Stern Securities Corp. negotiate the potential purchase of Pali Capital and was to become CEO of the combined firm, overseeing about 250 people, people familiar with the talks have said. Molinaro was Bear Stearns’s chief financial officer from 1996 until 2008, when JPMorgan Chase & Co. purchased the company to save it from bankruptcy.

Separately today, New York-based JPMorgan filed a $4.5 million lawsuit in New York State Supreme Court in Manhattan against Pali and Reifler, alleging a loan default.

“Pali was responsible” for the debt, Reifler said in a telephone interview. “When I left in October 2008, there was $66 million in cash, and the loan should have been paid from those funds.”

The case is In Re Pali Holdings Inc., 10-11727, U.S. Bankruptcy Court, Southern District of New York (Manhattan)”

According to ZeroHedge,

The reason for the bankruptcy was provided in the filed affidavit as follows: “Pali Capital experienced consistent pre-tax losses commencing with the second quarter of 2008 and continuing through and including the fourth quarter of 2009, caused by among other things, a substantial slowdown in sales and trading by Pali Capital’s primary institutional clients. These losses are projected to continue into at least the first quarter of 2010. As a result, it was difficult for Pali Capital to maintain adequate levels of excess regulatory net capital to support normal business operations, although Pali Capital is in compliance with its minimum regulatory net capital requirements through February 28, 2010.” So after 4 CEOs in 17 months all Pali is left with is a list of secured and unsecured creditors. And in probably not the wisest move for the privacy of said creditors, the firm has listed the home addresses of Kevin Fisher, Ari Nathan, Leon Brenner and some other rather high profile financiers.

List of largest secured creditors (and home addresses):

Pali Bankruptcy

Starwood to Raise $2.8 Billion to Invest in Distressed Real Estate Debt

Thursday, April 1st, 2010

Starwood, the commercial real estate investment firm started by Barry Sternlicht is raising approximately $2.8 billion purchase commercial real estate debt  during the biggest commercial real estate dislocation of the decade.   The Starwood Global Opportunity Fund VIII will target property and distressed debt.  Recently, Starwood’s second hospitality fund also raised $1 billion.  Sternlicht has been extremely bullish on specific deals in the market because of his close relationship with the FDIC.  He believes that most regional banks are essentially bankrupt, and this is the perfect opportunity to scoop up cheap real estate debt at 50 cents to the dollar.

According to Mr. Keehner of Bloomberg, “Starwood Capital Group LLC, the investment firm founded by Barry Sternlicht, finished raising capital for two funds totaling about $2.8 billion that will invest in real estate.

The Starwood Global Opportunity Fund VIII, which will target distressed debt and property, took in more than $1.8 billion, according to a person familiar with the effort. The Hospitality Fund II, which will invest in hotels, attracted almost $1 billion, said the person, who declined to be identified because the deal is private.

Starwood had previously raised about $10 billion of equity for 11 funds and other investments, according to documents from JPMorgan Chase & Co., which helped the firm find investors. Starwood is leading a plan to bring Extended Stay Hotels Inc. out of bankruptcy and purchased loans in October from failed Chicago-based lender Corus Bankshares Inc. as the real estate market reels from a 40 percent drop in commercial property values from its 2007 peak.

“Raising new capital in this environment speaks to the team at Starwood and the deals they’ve been able to get done,” said Dan Fasulo, managing director of New York research firm Real Capital Analytics Inc. “Barry and his team are one of the few that have been able to put money to work in the past few months.”

Starwood Global Opportunity Fund VII, which closed in 2005 with commitments of $1.48 billion, was up 3 percent as of January, according to the person. Starwood Capital Hospitality Fund I, which closed in 2005 with commitments of $900 million, was up 10 percent, the person said.

FDIC Loans

Starwood plans to invest much of the new opportunity fund’s capital in the U.S., targeting distressed borrowers, lenders and banks taken over by the Federal Deposit Insurance Corp.

“Everyone knows of somebody who’s in trouble with something in real estate today,” Sternlicht, 49, said on a Feb. 11 call with potential investors, a recording of which was obtained by Bloomberg News. “It’s a great opportunity for us.”

Starwood, based in Greenwich, Connecticut, led a group in October that won part of a $4.5 billion portfolio of real estate assets that belonged to Corus before regulators took over the Chicago-based lender in September.

Starwood and its partners outbid their nearest competitor for the portfolio by more than $100 million, or 20 percent, people familiar with the sale said at the time. Sternlicht said on the call that Starwood is “spending a lot of time with the FDIC.”

Most regional banks in the U.S. are “effectively bankrupt,” Sternlicht said, providing an opportunity as $1.2 trillion of real-estate debt matures over the next four years.

Carlyle Hotel

Starwood Capital may also acquire distressed properties by taking positions in the debt, said Sternlicht, including the Carlyle Hotel on Manhattan’s Upper East Side. The firm bought mezzanine loans backed by the hotel for 50 cents on the dollar around January 2009, he said.

The Carlyle, owned by Rosewood Hotels and Resorts LLC, has seen cash flow drop since Starwood Capital bought the note, Sternlicht said.

“We’re just hoping they trigger a covenant,” Sternlicht said of the loan, which matures next March, adding that his firm could wind up owning the hotel for $400,000 per guest room, or about 30 percent of replacement cost. “We take over management; that would be a windfall.”

Sternlicht is also trying to take over ailing Las Vegas casino-owner Riviera Holdings Corp. four years after a bid he backed was shot down by shareholders.

Riviera Deal

Starwood Capital, along with “some friends,” bought control of Riviera’s first mortgage for about 50 cents on the dollar and is leading creditors negotiating a prepackaged bankruptcy, Sternlicht said. Riviera, which owns a Colorado casino in addition to the 55-year-old Las Vegas resort, defaulted on a $245 million loan in February 2009.

“We are now working to take the company through a pre- pack,” Sternlicht said. “It’s going very well. We lead the creditors’ committee there.”

Starwood Capital could own Riviera’s 26-acre resort for “about $5,000 a room, which is less than the cost of the furniture,” Sternlicht said on the call, without saying how much Riviera debt it held. “I’m thinking of it as a long-term parking lot. We’re just going to hold it and have very little invested in the deal.”

Starwood Capital is also working on a restructuring with “a multi-billionaire who has a large real estate portfolio,” Sternlicht said on the call. He didn’t name the person.

“Those are exciting opportunities when you have few competitors,” he said. “Most of our competitors are mortally wounded, especially the Street.”

Sternlicht founded Starwood Hotels & Resorts Worldwide Inc. in 1995 and was that company’s chairman and chief executive officer for almost a decade. Brands include the W, Sheraton and Westin.

He raised $810 million through an initial public offering of Starwood Property Trust Inc., a REIT. Shares have since dropped 3.5 percent.”

According to USA Today, “Starwood Hotels & Resorts opened it 1000th hotel  – the Sheraton Qiandao Lake Resort located on China’s Qiandao Lake.

“This hotel is emblematic of both our history and our bright future,” says Frits van Paasschen, CEO of Starwood, in a statement, adding Sheraton was the first international hotel to open in China in the early 1980s.

Starwood also says it plans to open 300 more hotels in the next three to four years.  “For the first time we have more hotels outside the U.S. than inside. And there is no more fertile ground to grow than in China where we plan to double our footprint to 100 hotels by 2012,” van Paasschen says.

In 2010, Starwood expects to open 80 to 100 more hotels, and about 70% of them will be outside the U.S.

In China, Starwood will open more than 20 hotels this year. In India, another growing market, Starwood has 26 hotels and plans to increase the total by 60% by the end of 2012.”