Perhaps few sectors in the finance industry have felt the brunt of the fallout from the subprime mortgage crisis and subsequent tightening of the debt markets more than private-equity investors, which have traditionally tapped lending markets to help finance a large portion of their mergers and acquisitions.
Banks aren’t expected to release the lending floodgates anytime soon, given recent gyrations, including the collapse of investment bank Bear Stearns. But some top private-equity executives who took part in a recent panel discussion said that while the debt crisis has made life more difficult for them, it has also opened up buying opportunities.
Thomas H. Lee Partners managing director Richard Bressler — also the former chief financial officer of Viacom and Time Warner Inc. — said at the 2008 Media Summit March 12 talked about how equity firms have had to put more of their own money into deals and absorb tougher terms and conditions from lenders.
Bressler pointed to THL Partners’s participation in the $12.3 billion acquisition of Spanish-language broadcaster Univision Communications in 2007. That deal, he said, was done at 11.5 times to 12 times annual cash flow in terms of leverage — a relatively large amount of debt — with no covenants and great flexibility.
“Fast-forward to today’s environment, there was a deal just done recently, [stock photography house] Getty Images,” Bressler continued. “The leverage structure was about one-third and a 60% equity section and more stringent covenants.”
Bressler didn’t want to predict how or when the credit crisis will play out, but said that the crunch has opened up some buying opportunities for private equity investors.
“If you’ve got an investment philosophy, with all of this dislocation going on in media properties, it’s really a great time to be a media investor,” Bressler said.
Bressler pointed to MoneyGram International, the second largest money-transfer company in the world, behind Western Union. THL Partners and Goldman Sachs have signed a definitive agreement (amended on March 17) to acquire a 79% stake in MoneyGram for about $760 million. The agreement calls for a March 25 closing, subject to terms that include MoneyGram obtaining $250 million in senior debt financing, the companies said.
Bressler said that MoneyGram might not have been attainable for THL Partners had it not put a large portion of its cash into mortgage-backed securities. At the height of the subprime mortgage crisis, MoneyGram’s investment portfolio had losses of about $1.6 billion — mainly because of big bets in mortgage-backed securities — and its stock, once trading in the $20-per-share range, had fallen to about $2. The purchase price works out to about $2.50 per share, the companies have said.
“That is the other side of the equation,” Bressler said. “There are opportunities out there.”
The online sector may also present some opportunities for investors, especially as that industry moves through its own consolidation wave.
Velocity Interactive Group founding partner Jonathan Miller said that Microsoft’s $44.6 billion bid for Yahoo might spur other deals among companies operating in Google’s shadow.
“I have believed for awhile that there has to be consolidation in the online space,” Miller, who also is the former chairman and CEO of AOL, said at the conference. “Nobody on their own can compete with Google.”
Miller said that Google has defined itself as a proxy for the entire advertising industry, not just for online advertising. And Google’s success along those lines forces consolidation.
“That to me is what you see playing out with Microsoft and Yahoo, which to me makes a lot of sense,” Miller said. “If you go back to the thesis that nobody competes on their own, then you’ve got to get together.”
Miller said that what is likely to occur in the not too distant future is the creation of a “super-class” of online companies that can offer advertisers a broad range of assets to deliver their message.
“That particular game can only be played by a handful of companies,” Miller said. “That’s part of the thesis around why you see the buying activity — which creates opportunity for investment — and why you must see consolidation at the top level of the game.”
Private-equity firms seeking investors also can look outside the U.S. economy to international investors. Sovereign wealth funds — vehicles for foreign governments to put their dollars to work — are becoming a growing source, the panelists said.
It is estimated that sovereign wealth funds have about $3 trillion at their disposal to invest.
Bressler did not want to divulge exact figures, but said that THL Partners raised “not an insignificant percentage” of its $8 billion fund from sovereign wealth funds. He added that THL Partners held a mini annual meeting last year in Dubai, United Arab Emirates, for that reason.
“We find that they [sovereign wealth funds] are very active, the people that run these funds are very knowledgeable and, quite frankly, they are looking to put more money to work than less money to work,” Bressler said. “They don’t always know which private equity funds to put money into. I think their challenge is going to be finding a home for their money. But every indication that we see is that they are long-term players in investing in private equity funds.”