PHH collapse: not a one-off

More deals will collapse like PHH and private equity buyers will continue to blame banks, according to counsel.

Blackstone's proposed $1.8 billion acquisition of mortgage and leasing business PHH from General Electric earlier this month. Straight after that announcement, Blackstone released a statement which put the responsibility for the collapse on the banks:

"We regret that the banks are now unwilling to provide financing under the terms they originally agreed," it said.

This controversial statement has filled many columns in the press, but external counsel sympathise with Blackstone.

"During the boom times, the banks marketed to private equity houses by saying that 'we are there for you come hell or high water'. This has been proved to be untrue," said one London-based corporate partner.

"In theory you have a watertight, legally-binding contract, but in the real world the banks will find a way to wheedle out of it if they can't shift the debt. As a result, we will see more deals falling through because of finance being pulled from under private equity's feet."

More cynical commentators may say that this is actually tactical. By blaming the banks, private equity houses may be hiding from the fact that they no longer want to make the investment due to the credit crunch. In most cases, it would be cheaper to pay the reverse break-up fee than take on the risk of the investment.

Indeed, after some doubt, it is Blackstone who has paid the $50 million reverse break-up fee to PHH and there has been no mention of it suing the banks to reclaim its losses. However, this may be due to the fact that it would discourage other banks from financing deals in the future.

There is a more clear-cut lesson to learn from the credit crunch and deals like PHH: banks will be less likely to finance heavily leveraged deals in the future.

"Banks aren't going to lend at the crazy multiples they have been," said one Los Angeles-based leveraged finance partner. "So when the private equity market returns, sellers are going to have to drop their prices." NP

Taiwan softens on private equity

Golf manufacturer Fu Sheng was finally taken over by Oaktree, after many delays

CVC Asia Pacific's $750 million public-to-private buyout of Nien Made Enterprise last November proves Taiwan's regulator is finally easing its protection of domestic companies.

The buyout, on which Clifford Chance advised CVC Asia Pacific, was only the second public-to-private deal in Taiwan. It will be welcomed by bidders in a country with a historically ambivalent attitude towards private equity.

The first, Oaktree's $1 billion buy-out of Fu Sheng, was beset with delays. Taiwan's Investment Commission, a cabinet-level committee responsible for approving high-profile private equity bids, dithered for two months over the bid, before approving it in July last year.

Buyouts also face difficulties with the Taiwan Stock Exchange (TSE), which is seen by many as weak and creates fears of losing market capitalization from large companies de-listing and not returning.

Understandably the exchange has been reluctant to allow recently acquired companies to de-list without a fight. And although the success of CVC's bid is encouraging, bidders may well remain sceptical about their chances in Taiwan.

Neither Fu Sheng or Nien Made are thought of as strategic companies, being manufacturers of golf club heads and window shutters respectively.

Carlyle's failed $6 billion bid for Advanced Semiconductor Engineering (ASE), the world's largest chip testing and packaging house, in April last year was seen as more representative of the market's limitations, with ASE holding strategic importance. TY

Approvals in China slowed yet further

Rumours abound in Beijing that China is planning to make life even harder for foreign investors in the country, by slowing the investment approval process.

The country's Ministry of Commerce (Mofcom) and State Administration of Foreign Exchange (Safe) are drafting a new rule that subjects all new foreign investments, in all industries, to both Beijing and local government approvals.

The onerous procedure, featuring only in real estate at the moment, will mean that foreign companies will have their applications transferred directly from local government authorities to central Mofcom in Beijing before being approved.

This will slow the process. Local approvals normally take between 30 to 60 days, while central ones take much longer and are more likely to be declined.

Investors remain on edge about the property market in China anyway. In the large cities, concerns over a possible asset price bubble continue to worry private equity and venture capitalists. TY

Uncertainty on the future of protectionism

Governments want to be king of the castle

Support for national protectionism in M&A was thin on the ground during a session of the American Bar Association's conference in London last autumn. Save a lone question from the floor on whether national champions truly have a detrimental affect on the macro economy, the running theme was clear.

Even the speaker designated to fighting for protectionism, Cani Fernandez of Cuatrecasas' Brussels office, had a proviso. "When planning this session, someone had to be the bad guy," she said. "That doesn't mean that I necessarily believe the argument."

However, the panel did seem a little nervous about the future. Marco Lamandini of La Scala & Associati in Milan opened the speeches by pointing out that although the Takeover Directive seemed to have abandoned protectionism, it actually had not.

"On first appearances, Europe was going the opposite way to the US where anti-takeover devices are prevalent," he said. "But article 12 sets out an optional regime. The national implementation of the directive marked a failure in the attainment of a pan-European level playing field for cross-border takeover bids. Liberalism failed."

Fernandez followed this with a more political viewpoint: "If a time for increased protectionism comes, we have the tools available," she said. "Mr Sarkozy says that protection is not taboo anymore. If we have a few more leaders like him at EU level, we may see changes."

Further fears were raised by Carles Esteva Mosso from the European Commission, who commented on the redrafted European Treaty: "Now competition is not seen as a major achievement of the EU," he said. "We need to put a sentinel on every hill as the Commission may not be able to intervene in the future. Hopeful lobbying will avoid this." NP

Private equity code fails to mollify critics

The announcement of a voluntary code of conduct for UK private equity unexpectedly increased political pressure when it was announced last November.

Initial reaction from politicians and unions was that the code did not go far enough.

This surprised some. Speaking on the eve of the announcement, one partner at a US firm predicted that the code would mollify critics: "The code will have some run-of-the-mill concessions, but it won't have a great affect on the market," she said. "It will do just enough to take the pressure off the market and, at least in the short term, quieten those calling for more disclosure."

Many agreed that the code would take the pressure off; instead the focus on private equity has returned.

One reason is that the code was reportedly watered down in the last few days. Speculation is that private equity houses spent the last week lobbying former Morgan Stanley chairman Sir David Walker, who drafted the code.

The code will ask 65 private equity-owned companies to publish extra information on their accounts ownership and prospects.

In addition, around 250 companies will need to produce an annual review. This includes listed companies sold to private equity for more than £300 million ($619 million) and unlisted companies bought for more than £500 million. To fall under the code, companies will also have to employ more than 1000 staff and generate over half of their revenues in the UK.

But the final code has some big changes from the consultative document Sir Walker published in July. That document suggested that each private equity company would have to produce attribution analysis, explaining whether returns had come from financial engineering, expansion or operational improvements.

The new code only asks for attribution analysis of the industry as a whole. The deadline for publishing annual results has also been extended from four months to six after year end. The interim deadline has been pushed back from two months to three after the half-year.

As IFLR predicted in March, it looks like the private equity code of conduct is a sop to public concern.

The same IFLR story suggested that despite the code being voluntary, the British Private Equity and Venture Capital Association (BVCA) would enforce compliance by threatening penalties, including expulsion. There has been no comment from the BVCA to confirm if this is still the case. NP