Sabre - Michael Lewis

Silver Lake Partners and Texas Pacific have agreed to acquire Sabre Holdings, the owner of Travelocity.com for $4.4 billion. It will be interesting to see what they do with the company. It has half a billion or so in debt which was assumed and the other portion of Sabre’s business is its reservation system. From what I’ve read, this portion of the business is dying. So basically it’s a big play for Travelocity and I think to get anything of this investment, they’re going to have to increase revenue from Travelocity somehow. I would imagine they would merge the other portions of the business into Travelocity and create a company that, under the Travelocity name, provides all sorts of travel-related services. We shall see.

I know there have been a couple of different viewpoints on Michael Lewis’s piece in Bloomberg yesterday. A lot of people disagree with what he has to say about the private equity model, especially when he mentions how he feels that the middle class has been left/shut out from private equity investment and how this is unfair. Also he talks about how growth in private equity will hurt the capital markets. To his defense, he has limited exposure to how the industry works and is most likely basing his opinions on limited research, but you can’t completely throw his argument out. I too do believe that as more and more investor flock to private equity, capital markets will suffer, but also once private equity gets over-invested in, things should even back out (just like with hedge funds). He is correct however, when he says that the middle class has been left out of private equity. It’s virtually impossible for one to invest a small amount of money in private equity, but it’s the nature of the business and it takes big money to get big returns nowadays. Capitalism at its finest I suppose.

Investment in the Environment

The Supreme Court has now stepped into the debate over global warming via a lawsuit filed by 12 States and 13 environmental groups against the EPA, charging that it is the EPA’s duty to regulate greenhouse gasses (Article). Initial debate as been over whether or not the EPA has the right or the responsibility to limit greenhouse gas emissions, but at some point the debate will ultimately have to be changed to how to limit greenhouse gas emission. All this got me thinking; what will be the implications on private investment if any sort of law or regulation is put into place?
We’re all aware of the huge push that has been made already into alternate fuels such as ethanol, but those investments have not been as profitable as first imagined and demand could be wavering. Consider the recent ethanol IPO withdrawals. What I’m more interested in is how investments in environmental companies have fared in the recent past. That is, companies that are engaged in promoting the preservation and protection of the environment and wildlife by addressing issues such as clean air and water, global warming and conserving and developing natural resources. According to my sources, since 2000, $1.04 billion of PE money and $120 million in venture funding has gone towards such companies (in the US). And since 2000, these combined investments have had an unexciting return of -3.98%. Now, obviously, any sort of regulation would most likely have a positive effect on overall number of dollars invested and future returns, but since the turn of the century, investment in the environment has not been profitable. Since 2000 investment in environmental companies by VC and PE firms as accounted for just four-tenths of a percent of all total investments. What can be done to increase this number? In an ideal world, these are the sort of investments that would yield the most profit, where environmental profit and monetary profit would go hand-in-hand. I really hope I live to see such a day.

Pastics

I was looking through some random statistics today and found that in Q2 the largest end-to-end growth in terms of dollars invested in private equity came in the chemicals and material focus group. Growth was up over 225%. I took a closer look and the majority of companies that were bought out within this focus group during Q2 were companies that dealt with plastics, including the forming, molding, coloring , etc. of plastics. Not sure why this would be, but I was thinking it may be linked to oil prices. I’m not quite sure, but I think oil plays a large part in the manufacturing of plastics. So, either lower oil prices are predicted by PE firms, which would reduce the cost of production and thus increase profits. Or, it might be looked at from the opposite viewpoint, where higher oil prices would increase the cost of plastics and there could be an opportunity or a bit of price gouging. Just some thoughts, not sure which train makes more sense.

Carlyle/Club Deals

So, I just read that Carlyle is going to make a $5.46 billion bid for Advanced Semiconductor Engineering. Obviously they are not the sole bidder, but there's a consortium. I haven't a clue who the other firms involved could be. Just recently I did a research piece on these so called club deals where these larger firms are coming together to conduct these huge scale buyouts. Carlyle was somewhat of a late entrant into these larger club deals, but recently I believe that they have teamed up with J.P. Morgan, Clayton, Dubilier & Rice, KKR, Providence Equity Partners, and Bain Capital in such deals as Hertz, PanAmSat, and AMC Entertainment. I'd imagine they'd be teaming up with at least one of the aforementioned firms. Now I know the offer has not yet been made, but I wonder what the implications will be give that Carlyle was one of the firms named in the suit against larger private equity firms by investors in the companies they bought out.
In this case it doesn’t seem as if there are any other bidders, however the offer price is clearly a premium over the current stock price. The question is that if there was another group bidding for the company, would the price have been higher? Who knows. I would think yes, but there has to be some ceiling and having done their homework I would think that no one would bid much higher than what they perceive the worth to be. OR it could be because the so called collusion the lawsuit mentions where the firms all agree to not bid above an agreed-upon price. I find this hard to believe. And so I also believe the lawsuit has no merit. It should be interesting to see what happens with this deal and who the other firms involved are. I’d appreciate some feedback, or especially if someone has some further insight.