5 Bad Private Equity DealsAuthor: Max Odenthal
Private equity deals are the ones that need to be done carefully. Employing a virtual data room is just one of precautions that need to be considered but, unfortunately, not the only one. Here are 5 bad private equity deals so you can learn something from these examples.
TPG Capital and Washington Mutual, 2008
In 2008, private equity firm TPG Capital led a capital infusion of $7 billion dollars into the savings bank Washington Mutual, in a private equity deal immediately lauded as the worst in history. Within 5 months, TPG Capital had lost the $7 billion it had spent on the capital infusion, as well as a $1.35 million investment in the firm – quicker and larger losses than any other deal between two single parties in history. Unfortunately, there is not much that investors can learn from this deal – the biggest problem was that TPG were, well… unlucky. Just after the deal was signed, the 2008 financial crisis struck America. In September 2008, Washington Mutual customers withdrew $16.7 billion from the bank, 9 percent of the total deposits it had held beforehand. By the 25th of September 2008 the United States Office of Thrift Supervision seized the bank, selling it to JPMorgan Chase for $1.9 billion. Considering its total assets under management, it was the largest bank failure in American history.
The leveraged buyout of TXU Corp, an energy firm, was the largest private equity deal in history, although, as it involved so many players, its failure can’t be ranked quite as low as the Washington Mutual deal which was managed by only one private equity firm. Multiple private equity firms, including Goldman Sachs Capital Partners, TPG Capital and KKR, took over the company in October 2007 for $45 billion. The deal gambled on the prospect of rising natural gas prices, whereas natural gas prices fell sharply in the years after the deal. Energy Future Holdings, the company that was produced by the buyout of TXU Corp, filed for bankruptcy in 2014 as it was unable to repay the more than $40 billion in debt used in the buyout.
Cerberus and Chrysler
In 2007, Cerberus purchased an 80 percent stake in American automotive company Chrysler for $7.4 billion, hoping to bolster its performance as an independent company after its failed merger with the German car-maker Daimler Benz. And Cerberus became another victim of America’s unprecedented meltdown in 2008. By 2009, Chrysler went bankrupt, forcing Chrysler to give up its 80 percent stake in the company. This was the first American automotive bankruptcy since Studebaker in 1993, and the largest investment that Cerberus had ever made.
Although the deal may have lost more money and be more of a high-profile failure than any other private equity deal in history, Cerberus and Chrysler can’t claim the top spot among disastrously bad private equity deals because the story has a happy ending for Cerberus. Cerberus retained Chrysler Financial, once the lending arm of the automotive giant, until 2011. Chrysler Financial received substantial financial aid from the US Government, including $1.5 billion from the Troubled Asset Relief Program. Cerberus agreed to sell most of their assets in the company in 2011 to TD Bank Group for $6.3 billion in cash, retaining $1 billion. This allowed Cerberus to regain most of the losses they had made in this deal.
KKR, Hicks, Muse, Tate & Furst and Regal Cinemas, 1998
In 1998, private equity firms Hicks, Muse, Tate and KKR announced their plans to jointly acquire Regal Cinemas, the US’s third largest cinema chain, in a leveraged buyout valued at just under $2 billion. This allowed Regal Cinemas to merge with Act III theaters, which was owned by KKR, to create the largest cinema chain in the United States.
On the one hand, Regal failed to exploit its newly found size advantage, and on the other, the cinema industry was facing difficulties in 1999. United Artists also dropped out of a merger with the group, preventing further expansion. To make matters worse, Regal Cinema’s high debts ground profitability to a halt. By 2000, Standard and Poor’s had lowered the company’s credit rating from a healthy BB to a painfully low D at the time of its acquisition. In December 2000, the firm filed for bankruptcy and KKR and Hicks, Muse, Tate & Furst got nothing in the restructuring. They lost $1 billion each from the leveraged buyout and $500 million that they had invested in the company afterwards.
Simmons Bedding Company
Simmons Bedding Company’s multiple private equity deals illustrate the moral issues that many people have with private equity companies and the financial sector as a whole. Simmons Bedding Company is likely to be the company with the most private equity sales in history. Simmons was stuck in a revolving door of private equity deals from 1986 to 2009, each one piling more debt onto the company.
The first private equity deal the company was involved in was with Wesray Captial in 1986, and was eventually flipped 7 times before filing for bankruptcy because of its $1.3 billion debt. Employees suffered greatly under the yoke of these private equity firms: in 1989, for instance, after Simmons had stopped contributing to a pension plan as part of a private equity deal, employees lost their retirement funding as the price of the stock plan shares that were meant to fund them tumbled. After the company’s bankruptcy in 2009 1000 employees were laid off. By contrast, private equity firms made huge profits: Thomas H. Lee Partners, the private equity firm that oversaw the bankruptcy, pocketed around $77 million in profits.