Activist hedge fund managers, who like to shake up public companies, and private equity firms, which often relieve the pressure by taking those same businesses private, are increasingly clashing over the issue of valuation of deals.
One of the most recent – and most fraught – examples is the brewing shareholder revolt against Clear Channel Communications’ $26bn buyout agreement last November with Thomas H Lee Partners and Bain Capital.
Clear Channel’s major shareholders, including Fidelity Investments and Highfields Partners, have signalled their intent to oppose the deal in a shareholder vote set for Thursday, insisting the company is worth significantly more. Now, Calpers, the US pension fund, which owns less than 1 per cent of Clear Channel, has added its opposition to the proposed buyout, reports Reuters.
But in a frantic effort to save the deal, Thomas H Lee and Bain Capital have proposed sweetening their $26bn offer, the New York Times reported on Monday. In a letter to Clear Channel’s board, the two private equity firms proposed several alternatives including an offer for present shareholders to have the chance to co-invest in a part of the deal through stub equity.
The offer of a stub could appease large investors who are expecting the company to do well, says the New York Times. But it is uncertain whether the proposal, or any other sweetener, will be enough to win the necessary proportion of shareholders ahead of Thursday’s crunch vote.
Commenting on the spiralling tensions in this previously harmonious relationship, MarketWatch [via Private Equity Wire] cites hedge fund experts at the 2007 MARHedge conference in San Francisco on Monday predicting more fights between hedge fund activists and private equity firms.
In the past, activist hedge funds helped private equity firms along by finding under-performing companies, criticising executives publicly and arguing for a sale – often to a buyout firm. Now, amid an LBO boom, some they’re trying to scupper deals they consider undervalue the target companies, notes MarketWatch.
“There’s going to be much more of a fight between hedge fund activists and private-equity firms in future,” said Sandra Manzke, chief executive of Maxam Capital Management, a $2bn hedge fund investment firm, told MarketWatch.
It’s no longer enough for struggling companies to just sell themselves in an LBO — companies must get a good price too, said Karen Finerman, president of Metropolitan Capital Advisors, a $400m hedge fund firm that takes activist positions. She noted the new trend for shareholders to vote against some LBOs — a change sparked by some large LBOs that undervalued the company being acquired.