TPG’S OREGON TRAIL
TPG has had much success with energy deals like Texas Genco, but the firm’s experience with Portland General Electric (PGE) was a long and frustrating road that ended in 2005 with the Oregon Public Utility Commission blocking the $2.35 billion deal.
As a public utility, PGE can only change ownership if such a transaction can be shown to benefit consumers. Over the course of two years of public hearings, TPG, led by partner Kelvin Davis, was unable to convince the commission that rates would not be raised. Kelvin argued that TPG would be able to deliver some $43 million in savings to Oregon consumers, but commissioners kept arguing that the debt burden and TPG’s profit motives would ultimately lead to higher rates.
The PGE non-deal was a cautionary tale for private equity firms with an appetite for highly regulated, monopolistic companies.
STRANDED IN KOREA
Perhaps the longest-running, high-stakes standoff in private equity has been the attempted exit of Korea Exchange Bank (KEB) by Lone Star Funds.
If Texas-based Lone Star could just get out of its investment in the bank, it would go down as one of the most successful deals in Asian private equity. The firm bought a controlling stake in KEB in 2003 for $1.3 billion. At the time South Korea was still recovering from the 1997 financial crisis and the political obstacles to a foreign investor acquiring a troubled local bank were in the case of KEB lowered. It wasn’t until three years later when Lone Star attempted to sell its stake to another Korean bank for $7.3 billion that prosecutors unveiled their investigation into the circumstances surrounding the 2003 acquisition.
Prosecutors charged Lone Star’s Seoul head, Paul Yoo, with conspiring to artificially reduce the purchase price of KEB. Lone Star founder John Grayken flew to Seoul to testify in the case. The firm itself was never found guilty of wrongdoing, but Yoo was jailed for five months in 2008 and today faces a retrial.
Lone Star again tried to sell its stake in KEB to HSBC in 2008 for a lower price, and was again thwarted. It is now in the process of trying to sell its take to Korea’s Hana Financial, but this transaction was blocked in May with the stated reason that regulators needed more time to determine if Lone Star was a legitimate shareholder. At press time, the Seoul High Court was expected to make a ruling in the matter on October 6.
Lone Star has managed to nearly break even on its investment via a smaller stock sale and dividends, but the blockbuster exit that could have been has repeatedly been quashed by legal issues.
The accusations leveled at Mickey Drexler and TPG in the take-private of J. Crew ended with a $16 million settlement to shareholders. But prior deals have been fully blocked in court for similar allegations. An early example of this was the 1988 attempted buyout of textbook publisher Macmillan by Kohlberg Kravis Roberts.
What would have been a $2.5 billion deal in the first “golden era” of LBOs instead was killed by the Delaware Supreme Court, which ruled that Macmillan’s board members had been given inaccurate information about the auction process. The ruling also forced the bookseller to drop a “poison pill” agreement it had with KKR.
The court found that the auction for Macmillan was subject to manipulation by the company’s CEO and COO, Edward Evans and William Reilly, respectively. According to the court decision, “That search process appears to have been motivated by two primary objectives: (1) to repel any third party suiters unacceptable to Evans and Reilly, and (2) to transfer an enhanced equity position in a restructured Macmillan to Evans and his management group.”
It was a template for suspicion that would be returned to again and again in take-private deals.