Last month, KKR and GS Capital Partners agreed to acquire audio equipment maker Harman International for approximately $8 billion. As a sweetener for skeptical Harman stockholders the buyers offered to let approximately 8.3 million shares be swapped for equity in the private edition of Harman. That works out to around $1 billion, or a 27% equity position post-transaction.
I wrote at the time that such giant deals should prove a boon for private equity secondaries firms, since mutual funds and other stub equity holders may balk at holding private Harman securities for three to seven years (typical PE holding period). And how else could they be traded, except as one-off transactions amongst themselves? After all, the Harman press release stated that “the shares will not be listed on any exchange, although the buyers expect that there will be market makers in the stock.” (read full release here: harman-kkr.pdf)
People close to the transaction, however, tell me that the term “exchange” was only intended to cover things like NYSE and Nasdaq — not over-the-counter services. In fact, Pink Sheets is the expected destination when Harman shareholders receive their proxy statements in the mail.
But I smell another OTC option: The GS Tradable Unregistered Equity OTC Market.
What is GSTrUE, an awkward acronym? It’s a new quasi-public exchange discussed in this morning’s WSJ, in a story about how Oaktree Capital Management is planning to sell a piece of its management company (as noted here last month). WSJ reports: “Only institutions and highly sophisticated investors will have access to the market. At its launch, Oaktree will be the first and only issue on the market.”
But you’ve got to wonder if Harman will be the second. Not only does it have securities in need of OTC trading, but Goldman Sachs will be one of its private equity sponsors and bondholders. My understanding is that this issue has not yet been raised with Harman, but it just makes too much sense not to happen…