November 20, 2006

KKR, Carlyle, 11 Others Accused of Rigging Buyouts

Last week, a lawsuit – Murphy v. Kohlberg Kravis, 06-cv-13210, Southern District of New York (Manhattan) – was filed accusing a slew of buyout firms of rigging buyouts. We have posted a copy of the complaint in our “M&A Litigation” Portal – and this lawsuit is analyzed in this blog.

Below is an article from Bloomberg on the lawsuit:

Kohlberg Kravis Roberts & Co., Carlyle Group and most other major U.S. buyout firms were accused in a shareholder lawsuit of illegally conspiring to hold down the prices they paid when taking companies private.

The suit was filed in Manhattan federal court by investors who claim they were shortchanged because the firms restrained bidding for leveraged buyouts such as the $33 billion takeover of hospital chain HCA Inc., the largest LBO ever. It alleges the firms broke antitrust laws by forming “clubs” to make offers, sharing information and agreeing not to outbid each other.

“Investors in the target company are deprived of the full economic value of their holdings and `squeezed out’ at artificially low valuations,” says the suit, which seeks class- action status. Private-equity firms, which have announced a record $425 billion of LBOs this year, are already the target of a U.S. Justice Department investigation into possible antitrust behavior. They’ve also come under fire in Europe and the U.S. for burying the companies they buy in debt while recouping their costs with dividends.

The lawsuit, which seeks unspecified damages, resembles a pending antitrust case in Manhattan federal court. That one accuses 12 investment banks, including Goldman Sachs Group Inc. and Merrill Lynch & Co., of rigging initial public offerings of technology companies in the late 1990s. A federal appeals court last year ruled that the case, which alleges that the firms required investors who received IPO shares to buy additional stock in the after-market, can go forward. “This is a class action for people who were bought out,” said Fred Isquith, a lawyer at Wolf Haldenstein Adler Freeman & Herz in Manhattan, which brought the case.

Triple Damages

U.S. District Judge Louis Stanton in New York will determine whether to grant the suit class-action status. The complaint seeks to represent tens of thousands of shareholders in dozens of LBOs. Since the lawsuit alleges violations of federal antitrust laws, plaintiffs would be able to recover triple damages if they win. The other firms named as defendants in the complaint are Clayton, Dubilier & Rice Inc., Silver Lake Partners, Blackstone Group, Bain Capital LLC, Thomas H. Lee Partners LP, Texas Pacific Group, Madison Dearborn Partners LLC, Apollo Management LP, Providence Equity Partners Inc., Merrill Lynch & Co. and Warburg Pincus LLC.

The only top-tier U.S. buyout firms missing from the suit are Cerberus Capital Management LP and Fortress Investment Group LLC. Other than Merrill Lynch, the suit doesn’t include the private-equity units of the largest investment banks. Officials for the defendants either declined to comment or didn’t immediately return phone calls seeking comment.

Three Deals

According to the suit, the named plaintiffs – L.A. Murphy, Marvin Sternhell and Henoch Kaiman — were investors in three companies: HCA, Univision Communications Inc. and Harrah’s Entertainment Inc. The suit says the investors would have gotten more for their shares if there had been “free and open competition” among the firms bidding for the companies.

Instead, the firms conspired to “artificially fix, maintain or stabilize” buyout prices. The 20-page complaint doesn’t provide any details on how the firms allegedly fixed prices. Private-equity firms use a combination of equity and debt for takeovers and seek to cuts cost, improve cash flows and invest in technology to bolster the long-term prospects of their investments before selling them after three to five years.

Lower Price

On July 24, a group including KKR and Merrill Lynch, both based in New York, and Bain Capital of Boston agreed to buy HCA. The firms were joined by Thomas F. Frist Jr., a co-founder of the Nashville-based company. The price, equal to $51 a share, was 6.5 percent more than HCA’s closing price on the previous trading day.

Univision on June 27 accepted an offer of $12.3 billion, or $36.25 a share, from a buyout group that included Chicago-based Madison Dearborn; Providence Equity of Providence, Rhode Island; Texas Pacific Group, which is based in Fort Worth, Texas; Boston- based Thomas H. Lee Partners; and billionaire investor Haim Saban. The purchase price was lower than the $40 a share that the Los Angeles-based company had originally sought before three buyout firms dropped out of a rival bidding group led by Spanish broadcaster Grupo Televisa SA. Blackstone and KKR, both based in New York, and Washington-based Carlyle pulled out amid disagreements over how much to offer.

Harrah’s Entertainment is weighing a buyout offer of $15.5 billion, or $83.50 a share, from New York-based Apollo Management and Texas Pacific Group after rejecting an earlier $81-a-share offer from the two LBO firms. The new offer is 11 percent higher than Harrah’s share price of $75.11 at 1:36 p.m. in New York Stock Exchange composite trading.