One thing to start: We asked DD readers on Tuesday to give Berkshire Hathaway’s Warren Buffett some deal targets. Here’s what you suggested: Coca-Cola, Walgreens-Boots Alliance, AIG and Inditex. Now back to the show . . .
What happens when a secretive hedge fund with a history of slashing costs gains control of hundreds of US newspapers? That’s a question tackled this week in a FT deep dive on Alden, a hedge fund that has made hefty profits by preying upon dying companies and stripping out value. The short answer to that question is simple: it’s ugly.
Alden, which is now locked in a takeover battle to control Gannett, one of America’s largest regional newspaper owners and publisher of USA Today, fashions itself as a saviour of troubled daily and weekly print outlets. But the reality is far from it.
The broader context doesn’t look great. More than 1,800 US newspapers, including century-old titles that survived the Great Depression, have closed in the past 15 years. In fact, the US has lost more newspaper jobs than coal mining ones.
What sets Alden apart from the rest? Is the owner of about 200 titles, including The Denver Post, The San Jose Mercury News and The Boston Herald, acting in a more egregious manner than other publishers? Many former and current journalists at their titles seem to believe so.
“People were still blaming [the paper’s demise] on Craigslist, and the internet,” says Chuck Plunkett, former editorial director at The Denver Post who resigned last year after criticising the hedge fund in the newspaper. “But . . . Alden is what was killing us.”
Who are the people behind Alden? The hedge fund’s founder, Randall Smith, is a godfather of investing in distressed assets who has trained legions of portfolio managers. Heath Freeman, one of Smith’s protégés, runs Alden’s day-to-day operations.
Bloomberg’s Joe Nocera revealed that Freeman “is a character straight out of the movie Wall Street”. What does he mean? Read his piece here. But, in short, Freeman’s father Brian spent his career representing unions (there’s a great obituary of him in The New York Times).
Still, how does Alden make money from troubled newspapers? Simple, it’s good old-fashioned asset stripping.
To find out more, read the piece written by the FT’s Anna Nicolaou, James Fontanella-Khan and Lindsay Fortado.
Small PE fish make their mark in the big pond
Several mid-market private equity groups have a message for their larger rivals: they’re no longer the junior varsity squad.
A growing list of relatively small buyout shops are going toe-to-toe with the biggest private equity firms in the business, writing big equity cheques and winning hotly contested auctions.
The list includes the likes of Veritas Capital, Francisco Partners, CC Capital, Siris Capital and Charlesbank. Their deals include the $5.6bn buyout of electronic health record provider Athenahealth, $6.5bn takeover of analytics group Dun & Bradstreet and $4.1bn purchase of travel technology provider Travelport, which were all struck last year.
According to Michael Chae, the chief financial officer of Blackstone, smaller deals tend to draw multiple bidders and therefore higher price tags. The megadeals therefore generate more attractive returns.
Larger scale primary deals, corporate sellers, corporate partners, more complex, more operational value creation potential, we think that’s where the better fishing has been.
For both Siris and Veritas, Elliott Management’s private equity arm Evergreen Coast Capital was critical to clinching their largest deals. The activist fund itself is gearing up for takeovers as it works on raising $2bn for its buyout efforts.
The reason that these small but plucky firms can compete: they have pulled billions of dollars in during their last fundraisings.
Francisco Partners, founded by former TPG principal Dipanjan Deb, raised more than $3bn for its latest fund in 2017. So did Veritas Capital, which is where chief executive Ramzi Musallam set up shop after spending part of his career working for noted investor and hospitality heir Jay Pritzker.
Both firms exceeded their previous fundraising records by more than $1bn, according to data provider Preqin. Siris Capital, founded by two former members of the mergers and acquisitions department at Goldman Sachs, is making an even bigger leap from earlier vehicles with its latest fund, also pegged above $3bn.
In total, private equity groups are sitting on $1.2tn of dry powder.
In interviews with DD’s Eric Platt and Mark Vandevelde, executives from several companies were keen to emphasise common themes between their most recent deals and the far smaller transactions from which they earned their stripes with investors.
Francisco’s Deb notes:
There is not much difference between a $500m transaction and a $3bn transaction, other than transaction size. You still have to pursue [the] same steps in diligence and deal process.
Read the full piece here.
Why international investors shouldn’t forget Gitic
The name Gitic rarely surfaces in international media these days. But when it does, there’s good reason to pay attention.
State-owned Qinghai Provincial Investment Group defaulted on a $10.9m interest payment in Hong Kong on Friday, marking the first default of a large state-owned enterprise on dollar debt since Gitic did 20 years ago.
Here’s why the reference to Gitic should catch the attention of anyone investing in China.
The Guangdong International Trust and Investment Company was one of China’s most powerful investment groups in the mid-1990s. Based in the southern province of Guangdong, the site of the country’s early economic reforms, Gitic was one of the first Chinese groups to tap large amounts of offshore US dollar-denominated debt to be invested onshore.
When it failed to repay $120m to foreign lenders in 1998, and declared bankrupt in early 1999, it sent a shock through a burgeoning circle of foreign bankers who were making their names on China opening up to international finance.
The company was a disaster. Most of its equity investments failed. In the end, 320 foreign creditors claiming $4.7bn took massive haircuts on their investments, according to the book Red Capitalism, by Carl Walter and Fraser Howie. “It called into question the central government’s commitment, if not its capacity, to stand behind its most important financial institutions,” according to the book.
Vice-governor of the province Wang Qishan, now Chinese president Xi Jinping’sright-hand man, made his name cleaning up the mess.
Perhaps most importantly, Gitic was the start of a wave of closures of trust companies and the start of a major restructuring effort of Chinese banks. In some respects it was the canary in the coal mine.
Qinghai Provincial Investment, based in a far-flung area in western China, is far smaller than Gitic. (More on that here from the FT). But there are echoes of the Gitic crisis today as more companies default on US dollar debt. Only this time, China’s offshore debt is magnitudes larger.
“This time it’s different; this time it’s much bigger,” Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets, said of China’s offshore debt. “At the time of Gitic 20 years ago, the US dollar debt was much smaller and much more manageable.”
Hip to be Square: Dimon’s regrets on display
Ah regrets. Every banker has them. Even JPMorgan Chase boss Jamie Dimon, Wall Street’s best-paid and longest-serving bank CEO. Dimon’s self-confessed miss is in the area of payments. “We didn’t see the opportunity, Square did,” he said, name-checking a payments software provider that’s boasting quarterly revenues of almost $900m, less than a decade after inception.
“They did all the stuff we could have done that we didn’t do, the adjacencies,” Dimon lamented to a packed crowd of JPMorgan investors and analysts at his soon-to-be-demolished New York headquarters, describing how Square became part of a companies’ ecosystems, offering them everything from payments solutions to intelligence on customer demands and tailored financing.
In the decade since Square’s launch, JPMorgan has had something of a technological awakening and is now spending an industry-leading $10.8bn to fulfil Dimon’s promise that “we are going to build what we need to build to be the winner, cynic or not”, though he admitted being a latecomer to the cloud computing party as well.
One thing he claims to have no regrets about is his decision not to enter the next US presidential race. “I love what I do and I think that would be tilting at windmills,” Dimon told a longtime investor who entreated him to toss his hat into the ring. Don Quixote is essential reading for 2019’s incoming JPMorgan class. You read it in DD first, courtesy of US banking editor Laura Noonan.
More on JPMorgan’s 2019 investor day here.
Penny James has been named chief executive of Direct Line, replacing Paul Geddes, who announced in July that he’d be standing down after a decade at the helm. James joined the UK insurer from Prudential in 2017. More here.
Insurer RSA has hired Charlotte Jones as its chief financial officer to replace Scott Egan. Jones previously held the same role at Jupiter Fund Management.
Baker McKenzie has hired Mark Mandel as a mergers and acquisitions lawyer in New York. Mandel previously worked at Milbank, Tweed, Hadley & McCloy.
Toronto’s brain gain Stricter immigration laws in the US have helped to push tech specialists into Toronto’s arms where the technology community is thriving. But don’t call it Maple Valley. (FT)
Size isn’t everything As a titan of the M&A advisory business, Goldman Sachs has typically targeted blockbuster deals. But with limited room to grow among its traditional client base, the bank is vying for transactions it would have previously snubbed. Can Goldman convince its bankers to chase smaller deals? (FT)
Weigh anchor Jane Ashcroft, a life-long Liverpool supporter and captain of Anchor, the not-for-profit provider of specialist housing and care for older people, says connecting with employees on the frontline is key. The care homes chief has come under fire for her half a million pound salary while some staff earn little more than the minimum wage. (FT)