Blackstone, Lipson Face $2.8M FTC Fine Over Graveyard Deal –

In an unprecedented move, the Federal Trade Commission (FTC) is holding a buyout professional personally liable for failing to comply with an antitrust regulation, sending a message to private equity firms that the FTC will go after individual executives if a firm is found in violation of filing procedures.

Howard Lipson, a senior managing director at The Blackstone Group, last month was ordered to pay a civil penalty of $50,000 for his role in submitting incomplete premerger documents related to the acquisition of Prime Succession, a chain of nursing homes and cemeteries.

Blackstone will pay a fine of $2.785 million for the same charges.

The FTC action is part of the continuing troubles that Blackstone has experienced with Prime Succession-an investment in which the New York firm could stand to lose most of its equity.

The Case of the Missing Document

In 1996, Blackstone co-invested with funeral home operator The Loewen Group in the acquisition of Prime Succession (BUYOUTS July 22, 1996, p. 8).

According to Dan Ducore, an assistant director at the FTC’s Bureau of Competition, Blackstone and Mr. Lipson violated the Hart-Scott-Rodino Antitrust Improvements Act of 1976 when they submitted a Notification and Report Form to the FTC that did not include a key document, which listed Loewen as a competitor in the cemetery and funeral homes sector. The FTC alleges this omission led them to waive a standard 30-day waiting period and allowed Blackstone to proceed with the deal.

The FTC further charges that Mr. Lipson knew, or should have known, that listing Loewen as a competitor might have delayed the transaction, possibly causing Blackstone to lose the deal. Golder, Thoma, Cressey, Rauner Inc., the Chicago-based private equity firm that originally owned Prime Succession, had an option to terminate the deal if Blackstone and Loewen did not receive approval for the acquisition within a certain time period, according to an FTC statement.

These circumstances have led the FTC to characterize Mr. Lipson’s and Blackstone’s violation as “gross negligence,” Mr. Ducore said.

“Regardless of whether [the omission] was intentional or not, we see it as not excusable,” he said. “We are trying to make a point that the people who certify with us are as liable as the entities they are signing for.”

Both Blackstone and Mr. Lipson have agreed to pay their respective fines, although a spokesperson for the firm declined to say where the money would be coming from. The $2.785 million leveled against Blackstone is based on $11,000 per day for every day the premerger documents were not in order. According to Mr. Ducore, Mr. Lipson could also have received the same penalty, but the FTC decided on a lesser fine.

The last time the FTC imposed a penalty this large for a similar violation was in 1996 against Automatic Data Processing, which closed an acquisition before the FTC reviewed the antitrust implications of the deal. No individual executives, however, were made to pay a fine in that case.

A spokesperson for Blackstone called the violation an “inadvertent error,” but said the firm would modify its filing procedures to ensure it would not repeat such a mistake. He noted that, after Blackstone submitted the omitted memorandum on competitive issues, the FTC approved the deal.

Lamentations for Loewen Group

Blackstone currently is trying to salvage its two investments alongside Loewen-$53 million in equity to finance a $300 million buyout of Prime Succession and $30 million in equity to finance a $250 million buyout of Los Angeles-based Rose Hills Mortuary & Memorial Park. The firm structured its investments through put-and-call agreements with Loewen, by which Blackstone could redeem its investments after six years for a guaranteed minimum annual return of approximately 25%. At the same time, Loewen also could call Blackstone’s equity stake after four years for a pre-determined price, limiting Blackstone’s upside potential.

Although Blackstone owns a majority of both companies, it cannot sell either without Loewen’s consent, according to buyout professionals familiar with the deal. Partners at Blackstone declined comment.

At the time, Blackstone, and others in the industry, considered the investments a no-lose proposition.

The Loewen Group now has fallen on very hard times. The Burnaby, British Columbia-based company’s stock in 1996 was trading at more than $40 per share and at press time had dropped to $1.13 per share.

Loewen’s woes may have stemmed from paying too much for properties, including the investments it made with Blackstone. Loewen and Blackstone paid a 24-times EBITDA multiple for Rose Hills, according to a statement from the investment bank Greif & Co. which brokered the deal. A source close to Blackstone said the buyers were expecting to quickly increase profits in Rose Hills because it was bought from a not-for-profit foundation that was not focused on generating revenue.

Meanwhile, Loewen has been suspended from selling pre-need services to customers in Florida (such as selling a coffin before a person has died). It was also discovered in Florida that one of Loewen’s operators accidentally unearthed more than one hundred infant graves and then knowingly threw the remains into an open trench and a dumpster. That case reportedly has been settled. Executives at Loewen could not be reached for comment.

Blackstone and Loewen are talking about unwinding the put and call, although the sides are not close to reaching an agreement, said sources close to Blackstone.

Blackstone could choose to be patient. In three years, the firm can sell either Rose Hills or Prime Succession if certain valuations are not met. Should this happen, Blackstone would keep all the proceeds from the sale and, if those proceeds did not match the 25% IRR, the firm could claw back the difference from Loewen, according to sources familiar with the agreement.

However, Loewen may declare bankruptcy. If this happens, a judge likely would consider Blackstone’s put-and-call agreement merely an administrative claim-thereby barring Blackstone’s repayment until Loewen pays other creditors first.

Blackstone also has no governance rights in Loewen and, therefore, has little to say about what path shareholders in the company choose to follow, sources said.

For the nine months ending Sept. 30, 1998, Rose Hills’ earnings have improved to $14.8 million from $13.7 million in 1997; Prime Succession’s earnings have improved more than 55% to $18.2 million from $11.7 million a year earlier, according to Loewen’s public filings.

Will the Dead Rise Again?

There are indications that Loewen does not want to declare bankruptcy. The company this month sold 22% of its holdings, mainly its East Coast properties, to McCown De Leeuw & Co. so it could meet some of its credit obligations (see story, p. 10). Salomon Smith Barney is advising Loewen on its strategic alternatives.

The situation represents the first time that a put-and-call agreement may fail to guarantee a minimum return for a financial buyer, G.P. sources said. Blackstone, in the past, has structured similar agreements alongside Six Flags Theme Parks and Union Pacific Corp.