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Private equity eyes coronavirus-hit industries: They’ve been waiting

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Munshi Ahmed | Bloomberg | Getty Images

The coronavirus pandemic is shutting down entire sectors of the economy and putting millions of Americans out of work, but one corner of Wall Street may find opportunity amid the carnage: private equity.

The group, which includes investment giants Blackstone, Carlyle and KKR, has a record $1.5 trillion in cash ready to deploy and has been actively seeking deals across the struggling travel, entertainment and energy industries, according to a half-dozen investment bankers who declined to be identified to speak candidly about potential clients.

“They have been waiting for this type of market dislocation,” the head of mergers at a major Wall Street firm told CNBC. “I don’t think they wanted something quite this bad, but they did want a pullback in valuation.”

Private equity firms have been stockpiling cash in recent years as rising markets made it harder for them to invest, accumulating a record pile of “dry powder” for deals. The industry typically buys undervalued companies with borrowed money, taking them private to spruce up operations for an eventual sale. The high company valuations that kept them at bay collapsed this month amid widespread business closures and quarantines of some of the world’s largest cities.

But the confluence of forces at play — an oft-maligned section of Wall Street seeking money-making opportunities in an election year and amid an unprecedented global crisis that has caused thousands of deaths — could invite greater scrutiny on the industry. Critics including Sen. Elizabeth Warren have said private equity firms enrich themselves at the expense of workers and the companies themselves, which sometimes end up in bankruptcy.

“Vulture investors, especially in private equity, are waiting in the wings to scoop up scores of struggling businesses on the cheap,” tweeted Rohit Chopra, an FTC commissioner.

The first deals are likely to be investments rather than full-on takeovers, the bankers said. Transactions known as PIPEs, or private investments in public equity, are one way companies under distress can quickly raise cash. The buyer gets shares at a discount, and the new stock typically dilutes the holdings of existing shareholders.

“Private equity is trying to do PIPEs all over the place right now,” said a senior investment banker at another top Wall Street firm. The targets are “every industry where stock prices” have collapsed, this person said.

One example of a PIPE made during the last crisis: In 2008, Leonard Green & Partners bought a 17% stake in Whole Foods for $425 million, an investment that yielded more than $1 billion in profit when shares recovered a few years later.

While travel, entertainment and energy companies are in obvious need for cash infusion as demand has evaporated, over the longer term, the coronavirus pandemic could favor industries including health care and home security, according to a presentation from management consultant Bain. 

Don’t take the money

For now, bank advisors are mostly telling corporations to ignore private equity money as lawmakers close in on a massive stimulus bill. The details of the $2 trillion bill, including the forms of relief struggling companies will get and at what terms, needs to be known first.

Another reason for a delay in deals: One banker said that private equity investors “only want to invest in the strongest companies” like makers of consumer staples, or top restaurant chains, and these companies aren’t yet willing to take on expensive forms of capital.

Still, even with anticipated federal aid like potential bridge loans, for many businesses, the crisis and its aftermath will take months, if not years, to play out, and collapsing revenue and share prices make them vulnerable to takeovers.

Last week, Goldman Sachs warned its clients to expect a rise in hostile takeovers and shareholder activism, according to a presentation sent to clients. The bank told clients that a shareholder rights plan, known as a poison pill, “is the single most effective takeover protection device” the companies can use, according to Vox, which obtained the memo. A Goldman spokeswoman confirmed its authenticity.

To be sure, private equity firms are also exposed to the coronavirus-induced downturn because they already own wide swaths of corporate America, including struggling retail shopping and entertainment properties. Even before the pandemic struck, lenders were increasingly concerned about defaults from companies owned by the PE industry.

As a result, many private equity firms are in “defense mode” across their portfolios, said one investment banking head.

Barbarians at the Gate

Still, because the industry’s management fees are based on investments that are locked up for years, private equity firms “should be quite resilient in the current market backdrop,” JMP Securities analyst Devin Ryan said Tuesday in a research note.

Private equity became widely known in the 1980s as a generation of corporate raiders including Carl Icahn and T. Boone Pickens sought bigger and bigger deals, culminating in the $31 billion takeover of RJR Nabisco in 1989.

The industry has swollen in size since the financial crisis, adding $4 trillion in assets in the last decade, as institutional investors including pensions and insurance companies seek out higher returns in a low-yield world. Last year, shares of PE firms Apollo and Blackstone soared roughly 90% after they changed their corporate structure to take advantage of the 2017 corporate tax overhaul.

While the market for leveraged loans has fallen off in recent weeks, leverage of roughly six times a target’s earnings is still available for private equity deals, according to the head of mergers quoted at the beginning of this article. Parties are having conversations about investments in hotels, restaurants, movie theaters and casinos, among other companies.

“These are fundamentally good businesses that are going to have a terrible year,” the banker said. “There’s an opportunity for private equity to go in there and take a meaningful stake or buy the company at a valuation they could not have gotten before.”

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Lebanon government set to resign amid outrage over explosion: Minister

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Smoke rises after an explosion in Beirut, Lebanon August 4, 2020, in this picture obtained from a social media video.

Karim Sokhn | Instagram | Reuters

Lebanon’s prime minister was set on Monday to announce the resignation of his government, the health minister said, after a devastating explosion in Beirut that has stirred public outrage and spurred a string of ministers to step down.

The Aug. 4 port warehouse detonation of more than 2,000 tonnes of ammonium nitrate killed at least 163 people, injured over 6,000 and destroyed swathes of the bustling Mediterranean capital, compounding months of political and economic meltdown.

The cabinet, formed in January with the backing of the powerful Iranian-backed Hezbollah group and its allies, met on Monday, with many ministers wanting to resign, according to ministerial and political sources.

Health Minister Hamad Hasan told Reuters that Prime Minister Hassan Diab would soon announce the resignation of the entire cabinet. Diab was set to deliver an address to the nation at 7:30 p.m. local time (1630 GMT), his office said.

For many ordinary Lebanese, the explosion was the last straw in a protracted crisis over the collapse of the economy, endemic corruption, waste and dysfunctional governance, and they have taken to the streets demanding root-and-branch change.

The information and environment ministers quit on Sunday as well as several lawmakers, and the justice minister followed them out the door on Monday.

Finance Minister Ghazi Wazni, a key negotiator with the IMF over a rescue plan to help Lebanon exit a financial crisis, prepared his resignation letter and brought it with him to the cabinet meeting, a source close to him and local media said.

Lebanon’s president had previously said explosive material was stored unsafely for years at the port. He later said the investigation would consider whether the cause was external interference as well as negligence or an accident.

Anti-government protests in the past two days have been the biggest since October, when angry demonstrations spread over an economic crisis rooted in pervasive graft, mismanagement and high-level unaccountability. Protesters accused the political elite of siphoning off state resources for their own benefit.

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Senators urge U.S. to remove tariffs on EU foods, beverages

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Bottles of French wine are displayed for sale in a liquor store on December 3, 2019 in Arlington, Virginia.

Olivier Douliery | AFP | Getty Images

A bipartisan group of 13 U.S. senators have asked the U.S. Trade Representative’s Office (USTR) to remove 25% tariffs imposed in October 2019 on European Union food, wine and spirits, according to a letter seen by Reuters.

The tariffs, in retaliation for EU subsidies on large aircraft, hit French wine, Italian cheese and single-malt Scotch whisky, as well as cookies, salami, yogurt, olives from France, EU-produced pork sausage and German coffee.

Seven Republican and six Democratic senators, including Robert Menendez, John Barrasso, Cory Gardner, Susan Collins, Dianne Feinstein, Pat Toomey, Kyrsten Sinema and Cory Booker said in a letter to USTR Friday that American “restaurants, retailers, grocers, importers and distributors” are experiencing “severe economic hardship due to the increased cost of goods.”

The senators noted “demand for these goods has declined, leaving importers and distributors with months’ worth of product, much of it perishable, in storage and in transit with no clear end date for the COVID-19 pandemic.”

USTR did not immediately comment.

Last month, Europe’s Airbus said it would increase loan repayments to France and Spain in a “final” bid to reverse U.S. tariffs and jog the United States into settling a 16-year-old dispute over billions of dollars of aircraft subsidies.

The United States last year won World Trade Organization authorization to impose tariffs on up to $7.5 billion of EU goods.

The U.S. Distilled Spirits Council last month urged ending EU and U.S. beverage tariffs, saying drinks firms on both sides of the Atlantic “have suffered enough.”

The group noted Scotch Whisky imports by the United States fell nearly 33% between October 2019 and May 2020, a $378 million decline over the same period a year earlier.

The EU in a separate dispute imposed 25% tariffs  on all U.S. whiskey imports in June 2018. Since then, U.S. whiskey exports to the EU have fallen by 33%, or $300 million, the group said.

Trade groups are bracing for an escalation this autumn when the EU is expected to win WTO approval to retaliate with its own tariffs over subsidies for U.S. planemaker Boeing Co.

USTR announced in June it was considering imposing additional tariffs on products from many EU countries including gin, vodka, beer, sparkling wine and other whiskies.

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After coronavirus, some CEOs plan to prioritize sustainability

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After coronavirus, some CEOs plan to prioritize sustainability