Top executives at buyout firms including Blackstone Group LP (BX), KKR & Co. (KKR), Bain Capital Partners LLC and Carlyle Group (CG) LP assured each other in e-mails that they wouldn’t compete on deals to avoid driving up prices and angering competitors, according to a now public court complaint.
The correspondence was cited as evidence that the firms rigged bids in 19 leveraged buyouts and eight other transactions, including the biggest deals of the leveraged buyout boom, according to the amended complaint unsealed yesterday by a federal judge in Boston.
“We would much rather work with you guys than against you,” Blackstone President Tony James wrote in an e-mail to KKR co-founder George Roberts in reference to the Freescale Semiconductor Ltd. (FSL) buyout, according to the complaint. “Together we can be unstoppable but in opposition we can cost each other a lot of money.” According to the complaint, Roberts replied, “Agreed.”
The disclosures are a setback for the industry’s efforts to clean up its image, which has come under scrutiny as Bain Capital co-founder Mitt Romney seeks to become the next U.S. president. Individuals and pension funds that held shares in companies including Freescale, HCA Holdings Inc. (HCA), Neiman Marcus Group Inc., Clear Channel Communications Inc. and Aramark Holdings Corp. sued the private-equity firms and large investment banks including Goldman Sachs Group Inc. (GS) and JP Morgan Chase & Co (JPM) in 2007 and 2008.
“KKR competes fiercely to find the best deals and the best companies for our investors,” Kristi Huller, a spokeswoman for the New York-based firm, said in an e-mail. “The plaintiffs do not challenge the perfectly legitimate practice of club deals but instead make the preposterous claim that the entire private- equity industry came together under a master plan to decide which firms would be permitted to acquire any particular public company.”
There is no evidence of such an arrangement, Huller said.
Peter Rose, a spokesman for Blackstone, declined to comment on the unsealed complaint.
The financial companies said in court filings that the plaintiffs didn’t have the right to sue for antitrust violations that would be subject to U.S. Securities and Exchange Commission regulations. They also said the transactions represented legitimate business practices.
“They neither identify any direct evidence of an actual agreement among these 17 defendants to fix the market for large LBOs nor allege circumstantial facts that support the plausibility of such a conspiracy,” the defendants said in court filings. “These transactions simply represent the normal workings of the mergers and acquisition business.”
The firms formed “bidding clubs” that rigged bids, limited competitive offers and “artificially depressed prices,” according to the lawsuit. Firms that weren’t part of the winning bidding clubs would get minority stakes in the acquired companies or fees as advisers.
“Joint bidding is central to the proper functioning of a well-regulated capital markets system,” the financial firms said in court papers.
Bain, the Boston-based private-equity firm co-founded by Republican presidential candidate Romney, along with KKR and Merrill Lynch, paid more than $32 billion for hospital operator HCA Holdings after other firms agreed not to make offers, according to the complaint. Romney isn’t mentioned in the complaint. He had left Bain before any of the deals were completed.
The disclosure of executives’ e-mails comes as the private- equity industry is already fighting to maintain its image during the U.S. presidential election. The industry’s lobbying group in Washington, the Private Equity Growth Capital Council, started an online campaign this year with testimonials of people who say private equity has helped the economy and grown their businesses. Supporters of President Barack Obama, a Democrat, have said the industry enriches managers at the expense of jobs.
“Private equity has taken a beating, in the sense that the image has not been wonderful in this campaign,” Carlyle Group co-founder David Rubenstein said in an Oct. 7 interview on Bloomberg Radio. “The image that has been left around the country is that private equity destroys jobs and doesn’t do things that are helpful to the economy, and I think that’s unfortunate.”
According to the investors’ complaint, KKR “asked the industry to step down on HCA.” The investors attributed the comment to an e-mail from Dan Akerson, then the co-head of Carlyle Group’s U.S. buyout group.
The plaintiffs claim that KKR and Bain were able to buy HCA at a “suppressed price.”
KKR’s $32.2 billion leveraged buyout of HCA ranks as the third-biggest LBO ever, according to data compiled by Bloomberg. KKR last year sold HCA in an initial public offering that raised $3.79 billion, at the time the most ever raised by a company backed by private equity, according to research firm Preqin Ltd.
Freescale, the former semiconductor unit of Motorola Inc., was purchased in 2006 by a group of firms including Blackstone, TPG Capital, Carlyle and Permira in a $17.6 billion deal.
“TPG never colluded to suppress deal prices,” Owen Blicksilver, a spokesman for the Fort Worth, Texas-based firm, said in an e-mail. “We competed vigorously for deals that the firm both won and lost. In instances where we considered, but did not move forward with a competing bid, it was a decision based on whether the pursuit and ownership of the asset would be in the best interest of our limited partners.”
In July 2006 Blackstone submitted an initial bid of $35.50 to $37 for Freescale, according to the complaint. The company accepted a $38 offer on Sept. 10. That same day firms including KKR, Silver Lake and Bain sent a letter to Freescale offering $40 to $42 a share, according to the complaint.
Blackstone, reacting to the late bid for Freescale, threatened to compete with KKR for HCA, according to the complaint. KKR withdrew from the auction and the Blackstone group’s bid was accepted.
“To insure that Blackstone could pay back KKR with an immediate quid pro quo, Steve Schwarzman hastily instructed his team to redesign its Clear Channel offer so it could convince KKR to partner at a lower price,” according to the complaint. Schwarzman is Blackstone’s chairman.
Clear Channel Communications was acquired by Bain and Thomas H. Lee Partners LP in July 2008 for $17.9 billion, before credit markets froze and the recession caused a drop in advertising demand. Clear Channel owns the largest U.S. radio broadcaster.
To limit the number of bids, investors allege in the complaint, the companies’ managers were offered incentives including new equity.
After a company was acquired, the new owners would often sell bonds to fund a dividend for themselves, allowing the private equity firms to recoup as much as 35 percent of their investment quickly and the banks to win fees for the debt sale, the lawsuit states. Later, the firms would sell the companies in public stock offerings, reaping more returns and fees.
The original complaint listed seven buyouts in which collusion allegedly occurred: Freescale, HCA, Aramark, Neiman Marcus, PanAmSat Corp., SunGard Data Systems Inc. and Kinder Morgan. (KMI)
A judge in 2010 allowed a second phase of discovery, or fact-gathering, for eight additional transactions, involving Loews Corp. (L), NXP Semiconductor (NXPI) NV, Vivendi SA (VIV), Community Health Systems Inc. (CYH), Nalco Holding Co., Cablecom, Susquehanna Media and Warner Music Group. Later in 2010 the judge allowed the plaintiffs to add other transactions. The amended complaint lists 19 leveraged buyouts and eight other transactions.
Two lawsuits were consolidated by the judge, who denied the financial firms’ motion to move the case to federal court in New York.
The amended complaint was unsealed after U.S. District Judge Edward Harrington granted a request by the New York Times to make it public.
The plaintiffs include the Police and Fire Retirement System of the City of Detroit, a public pension fund, and a Minnesota-based investor, Kirk Dahl, who owned shares of Freescale.
The case is Dahl v. Bain Capital Partners LLC, 07-12388, U.S. District Court, District of Massachusetts (Boston).