Collusion? What Collusion?


During the White House Correspondents Dinner earlier this year, emcee Steven Colbert said of President Bush: “He believes on Wednesday exactly what he believed on Monday, regardless of what happened on Tuesday.” Kind of reminds me of what I keep seeing on the private equity beat.

The first example came last month, when Sevin Rosen Funds suspended fundraising because the venture capital model was “severely damaged.” Three days later, Google agreed to buy venture-backed YouTube for $1.65 billion. Oops (I know, I know, one deal does not a market make…).

The second came yesterday, when 13 buyout firms were named as co-defendants in a class action lawsuit that accused them of violating federal antitrust laws (read: collusion). In short, the argument is that the big LBO firms no longer compete with one another for deals. Instead, they club up in order to preemptively shrink the buyer pool, and then drain it all together by making quid pro quo agreements that “We won’t bid against you on this deal, if you don’t bid against us on that deal.”

Pretty heady charge, particularly when the complaint (which you can read in yesterday’s post) doesn’t include anything close to a smoking gun. But there it sits anyway, with the following explanation from the filing attorneys: Back in the 1980s and 1990s, most big buyout deals were competitive. Today they aren’t. Examples include Harrah’s, HCA and Univision – each of which was (or will be) sold to the sole bidder. It just can’t be coincidence. It must be collusion.

But, like Sevin Rosen, this class-action lawsuit has a timing problem. Namely, today’s announcement that Clear Channel Communications has agreed to be bought for around $26.7 billion (including assumed debt) by Bain Capital, Thomas H. Lee Partners and a group of its lending partners.

This was no inside job, with Bain and TH Lee coming from the outside lane to knock off the favored team of Blackstone, KKR and Providence Equity Partners. And guess what Bain, TH Lee, Blackstone, KKR and Providence all have in common, besides an interest in owning Clear Channel? They each are named as co-defendants in the conspiracy lawsuit.

Just to make my point redundantly clear: These firms are being accused of anti-competitive behavior, despite having spent the past month in fierce competition for one of the largest leveraged buyouts in history. Apparently the quid pro quo got lost in translation.

A few additional notes about the lawsuit, and about the Clear Channel deal:

*** The 13 defendants are Apollo Management, Bain Capital, Blackstone Group, Carlyle Group, Clayton, Dubilier & Rice, KKR, Madison Dearborn Partners, Merrill Lynch, Providence Equity Partners, Silver Lake Partners, Texas Pacific Group, Thomas H. Lee Partners and Warburg Pincus.

*** The suit lists a variety of public companies that sold out at below “market rates,” but that apparently doesn’t mean below “public market rates” – since they all sold at premiums to public share prices. I mean they included SunGard, for goodness sakes. The attorneys acknowledge the irony, but insist that the true market rate could not be determined, because of the alleged anti-competitive behavior.

*** Most named defendants I spoke with declined to comment, but Carlyle Group spokesman Chris Ullman said: “This sets a new standard for frivolous lawsuits and we will vigorously contest it.”

*** It is possible that the I-banks and individual company board members will get added as co-defendants at a later date.

*** Hertz is in the news today for its quick flip, but wasn’t that also a competitive bidding process?

*** Down & dirty analysis: This suit is designed to leverage any possible allegations of wrongdoing that might get filed by the Department of Justice. If DoJ does, indeed, have some conspiratorial evidence, then this suit will piggyback off of it. If not, it goes nowhere.

*** Moving on to Clear Channel: Lots of press reports – including here – suggest that Texas Pacific Group bailed out of the Bain/TH Lee consortium at the last minute. These reports – again, including mine – were wrong. It actually dropped out around ten days ago, in large part because its personnel resources were stretched too thin by deals like Harrah’s.

*** Don’t expect the losing bidders to get equity syndication on the deal. They made a very calculated decision as to what they were willing to pay, and I don’t sense that the winners need much check-writing help (if any, given the lender participation).

*** Popular perception was that Blackstone/KKR/Providence had the inside track, because Blackstone initiated the buyout discussion with Clear Channel. But it should be pointed out that members of Thomas H. Lee Partners had relationships going back years with senior Clear Channel folks. That said, it was still a three-week sprint from a standing start.

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