File photograph of Investor Carl Icahn speaking at the Wall Street Journal Deals & Deal Makers conference at the New York Stock Exchange
As 2013 ends without ushering in the acquisition binge many expected, Wall Street’s buyout barons have been in selling mode.
A week ago, multi-billionaire Carl Icahn seized on the soaring value of his public vehicle, Icahn Enterprises LP (IEP), by having it issue two million shares in a spot offering, locking in some of the massive premium to the fund’s value that had built up with its 160% price surge this year. In order to buy alongside what Icahn is buying, some investors were forced to buy some of what Icahn was selling that day.
Activist icon Icahn has had a stellar 2013, thanks to big scores in Netflix Inc. (NFLX), Herbalife Ltd. (HLF) and Apple Inc. (AAPL). With his face on a recent Time magazine cover and his public partnership shares trading at an 80% premium to their recent net asset value, Icahn saw the shrewd opportunistic move was to lock in some of that premium to bolster his ammunition trove. As Barron’s noted after Icahn’s hasty stock offering, IEP continues to appear rather overvalued.
Pioneering private-equity firm Kohlberg Kravis & Roberts & Co. (KKR) might seem like it’s in purchase mode with its agreement Monday to acquire its debt-finance affiliate KKR Financial Holdings (KFN) for an initial price of $2.6 billion. Yet KKR is issuing its own shares to pay KFN shareholders, which suggests at minimum that KKR management views its stock as relatively richly valued compared to that of KFN, which is a vehicle started by KKR that buys and holds high-yield bonds and loans.
Indeed, even after slipping more than 1% Tuesday, KKR shares are up some 60% this year, have doubled in two years and trade above 2.7-times book value. As for KFN, it was something of an orphaned stock, having traded below its book value in recent months, and it was clever of KKR to reacquire the company to bolster its own finances.
And Blackstone LP (BX), the largest private-investment firm, has been hitting the market’s bid all year. Most recently and prominently, the firm’s largest-ever leveraged buyout, Hilton Hotels Worldwide Inc. (HLT), came public last week in a $2.6 billion offering that set its market value above $20 billion.
While Blackstone did not issue any of its Hilton shares in the IPO, it booked an $8 billion on-paper profit, and the deal follows more than $6 billion in “realization” sale proceeds from other deals in the first three quarters of 2013. This, of course, is what private-equity firms do a few years after companies have been in hand a few years, but the sell/buy imbalance has been lopsided this year.
Meantime, Blackstone President and Chief Operating Officer Hamilton “Tony” James has taken advantage of Blackstone shares’ 80% 2013 ascent by selling some $187 million worth of Blackstone shares over the course of the year. For sure, James is 62 years old and helped build Blackstone into the behemoth it has become over a decade. But is it not noteworthy at least that he has sold such a large sheath of shares at prices below Blackstone's $31 IPO price from 2007?
Grabbing the easy cash
These are obviously independent instances of buyout impresarios cashing in, driven by disparate and even coincidental forces. It's hard to take this amorphous potential trend as an outright warning signal on stocks and other risky assets. Yet it’s telling that, just as the broader pool of investors is warming to public equities, and credit markets are seemingly begging corporate predators to go shopping, several accomplished financiers are content to take what the market is offering them – easy cash, at today's quoted prices.
The relative lack of fevered corporate acquisitions and private buyouts this year (despite a few headline-grabbers, including the Dell buyout, Heinz acquisition and planned Verizon/Vodafone deal) has been something of a puzzle on Wall Street. Stock markets are levitating to record highs and junk-bond financing is cheaper than ever. This would seem a perfect formula for swelling CEO confidence and prompting aggressive bidding wars.
As for buyout firms, many of the funds they control have been consumed with reaping gains from the prior generation of deals, which peaked in 2006 and 2007. And as they’ve waited around, equity prices in many sectors have risen well above outright cheap levels that make a debt-enabled buyout a no-brainer.
That said, they have plenty of dry powder, have selectively picked up mid-sized public companies and divisions of larger businesses – and are reportedly busy raising some three-quarters of a trillion dollars for their next generation of funds.
Among big public companies, it may be no more complicated than the lingering psychological scars of the credit bubble and bust, after which a generation of CEOs took refuge in husbanding capital and using spare cash to buy back shares and bump up dividend payouts. Perhaps the turn of the year – with profit margins already lush and stock prices of acquiring companies being rewarded in deals – will bring a thaw.
There is certainly room for deal-making energy to rise in the coming year – as it tends to do a few years into a bull market as it enters an "overshoot phase" – perhaps catalyzed by the prospect of higher borrowing costs and a bit of global economic momentum.
Yet as the selling instinct among several sharp and seasoned private investment players shows, there’s a chance this bull market will have grown old and expensive before it turns particularly exciting for wheelers, dealers and spectators.