Competition A Concern As Equity Firms Hunt In Packs
Sydney Morning Herald
Saturday October 14, 2006
THE Wall Street Journal disclosed this week that the US Department of Justice is conducting a probe into the potentially anti-competitive behaviour of private equity firms. Perhaps the Justice Department ought to talk to Coles Myer.
The New York branch of the department is reported to have written to a number of big private equity firms, including Kohlberg Kravis and Roberts, which is spearheading the private equity tilt at Coles, requesting information about their practices and, in particular, it appears, about the increasing tendency of the firms to club together on major deals. There has been disquiet, and some commentary, in the US over the past year about the increasing "clubbiness" of the firms, which rarely contest each other's transactions. Whether that reflects collusion or, as the firms would argue, is simply a consequence of the increasing scale of the transactions and the desire of the firms to spread and diversify risk, is presumably at the heart of the Justice Department's inquiries. The other feature of the mega deals that involve consortiums of private equity firms is the tendency to lock up as many of the big lenders in exclusive agreements as they can, making it difficult for potential rival bidders to finance a competing bid. When KKR first approached Coles earlier this year it was backed by the Carlyle Group, CVC Asia Pacific and Newbridge Capital. As soon as the approach was disclosed in mid-August another, competing, private equity consortium started forming that included Blackstone Group, Pacific Equity Partners and Bain Capital. In the initial approach KKR, which had made an indicative and highly conditional "offer" of $14.50 a share, demanded that it be given exclusive rights to conduct a due diligence investigation of Coles' affairs. Within weeks, however, the two consortiums had merged (reportedly after KKR approached its prospective rival) and KKR, having subsumed its most likely competitor, told Coles it was no longer insisting on exclusivity in relation to a due diligence process. The enlarged consortium then went off and negotiated what are said to be exclusive funding deals with most of the major lenders in this market that run until June next year. An attempt by a third private equity consortium to raise funds for a Coles bid is floundering because it cannot put together a banking syndicate. The impact of locking up the major banks in a market this size is, of course, magnified relative to what would occur in the far deeper US and European markets. The concern in the US, and an emerging concern in Europe, is that the increasing incidence of private equity firms joining in uncontested "club" deals removes the competitive tension in bids, particularly the very large ones, and leads to lower prices than would otherwise be available to shareholders in the target companies. Whether that represents cartel-like behaviour or simple commonsense is an open question - in theory there ought to be other potential bidders, including trade buyers, for a Coles or any of the big offshore firms targeted by the firms. In an analogous situation, however, the Australian Competition and Consumer Commission took Tabcorp out of the battle for control of UNiTAB by arguing UNiTAB was the most logical bidder for Tabcorp's Victorian wagering licence and therefore a successful Tabcorp bid would substantially lessen competition for that licence. The ACCC argument was controversial - there are, in theory, a multitude of prospective bidders for the licence - but demonstrated its willingness to act to protect hypothetical competition in a market that did not yet exist. It would not be a massive stretch for the ACCC to apply similar thinking to the market for control of Coles shares, or to question the exclusivity of the banking arrangements, although it would be unprecedented and controversial. The informed view in the US appears to be that the Justice Department investigation is an information-gathering exercise, with the department seeking to understand the way the sector operates, rather a precursor to action against the funds. That would be consistent with the general increase in regulators' interest in private equity around the globe, although most of it relates to prudential concerns rather than anti-competitive behaviour. Our Reserve Bank is among a number of central banks and financial agencies worried about the mushrooming size and frequency of private equity deals around the globe, and the increasing leverage and decreasing returns occurring as the private equity share of corporate activity increases. Historically cheap debt - created not only by relatively low interest rates but decreased risk premiums demanded by lenders in a globe awash with excess lending capacity - is fuelling the private equity phenomenon. Historically, of course, the kind of credit-fuelled booms the private equity phenomenon represents not only end in unpleasant busts but tend to be characterised by behaviour that, usually with hindsight, regulators find reprehensible.
© 2006 Sydney Morning Herald
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