Two head-scratchers: big equity deals
We tend on this site to try to avoid discussing private equity buyouts. It's hard enough to track the motives and the intentions of strategic buyers who plan to, at least for a while, integrate the business in question into their growth plans.
With private equity buys, it's always hard to see what's really behind the deal. To a great extent, most of the magic will take place offstage (away from the spotlight of public disclosure) and at the end the company in question will be transmuted from lead into gold. Whether that will be done by selling of bits, stripping out assets, process reengineering, including capital for expansion, mass layoffs, speed-up offshoring, contract renegotiations, combination with other companies, only the private equity buyer knows in advance.
If oligopolies and their operations are too indeterminate for economists to meddle with, then private equity buyers have an almost unlimited range of options, all pretty much out of the public eye. Their decisions of what to buy at what rice seem like lightning bolts from Olympus.
Struggling with the behavior of oligopolies (a complex enough subject), we haven't been egger to take on the even less fathomable world of private equity. But circumstances are making that less and less likely. Nearly every strategic buy is now bid up by equity buyers. And the size of the companies purchased reaches higher into the tens of billions. Money abounds, and even the Chinese government looks ready to pour its billions into the equity game (based on its investment in Carlyle Group).
The two deals this week (among many others) that struck this is the announced sale of two companies we've written about often before.
Alltel
First TPG Capital (along with the equity division of Goldman Sachs) announced it would buy US wireless company Alltel. The deal is for $27.5 billion. This is not the first move by private equity into wireless telephone industry, but it is the biggest. Alltel is now the #5 wireless phone provider in the US, and has long been both an acquirer of small companies and a rumored target of the three bigger US wireless firms (AT& T, Verizon Wireless, and Sprint/Nextel). T-Mobile is #4.
Alltel specializes in rural wireless service and has some 12 million customers. Last year, it sold off its landline business, making it a pure wireless play. But Alltel trails far behind the big there in technology and customer base. TPG has said it will invest in bandwidth (there is an auction coming up). Apparently the price was too rich for Verizon, once rumored a likely buyer. And TPG beat out two other major equity firms KKR and Carlyle Group.
What no-one can figure out why TPG spent so much and how it sees a way to gain profitability in an industry dominated by bigger players and where even Sprint/Nextel is slipping badly. Meanwhile stock prices for Deutsche Telekom have gone up in the expectation that T-Mobile may be the next buyout target. Rumors are also flying about Sprint as well. The buyout is a real puzzle, though presumably these smart guys have something up their sleeves.
EMI
The other big deal is the proposed purchase of the world's #2 music company, EMI Group, by UK private equity company Terra Firma. The current deal is set at $4.9 billion, but that will go up as three US private equity firms Cerberus, Fortress and One Equity are likely bidders as well, and strategic buyers Warner Music, which has tried to buy out EMI in the recent past, may well be another bidder. As so often these days, the announcement of a "deal" is just the first bid in an auction. And EMI has frankly noted that it is interested in having a bidding war erupt.
Why would anyone want to buy EMI? Terra Firma is talking about radical cost-cutting, but EMI has been through plenty of that in the last few years. The problems of the recording industry are deep and they won't be papered over by a vigorous housecleaning. EMI recently announced an "unprecedented level of market decline'' and ``an exceptionally high level of product returns'' according to a Bloomberg story. As that story notes, US CD sales by all record companies dropped by 17% year-to-year in the last quarter surveyed.
EMI does have $3.5 billion in sales a year, and it does have lucrative music publishing business. And certainly new management might be able to reverse the suicidal thinking in the music industry, the groupthink, the miscalculation about digital music, that has helped lead to the implosion of industry.
No commentators I have read on these deals has offered an explanation that makes sense, at least to me. I wish I had a good explanation. In any case, it looks like I'll have to keep more of an eye on the private equity sector as it has become an inevitable player in every M&A deal.
9:35:17 PM 
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