Australian angst

A Senate inquiry will explore the merits or otherwise of private equity.

Questions have already been raised in a number of countries around the world over the role of private equity as mega-buyout funds continue to make waves with controversial acquisitions. Now the prospect of national carrier Qantas falling into private equity ownership has brought the debate to Australia, where the Senate recently announced it will carry out an investigation into what it calls the ?private equity phenomenon?.

Andrew Murray, Senator for Western Australia, garnered the support of the Coalition and Labor Party for an inquiry against a background of mega funds like Kohlberg Kravis Roberts, TPG Newbridge and various large country-focused GPs scouting the country for deals.

PEI Asia asked Murray, also the Australian Democrats corporate affairs spokesman, whether the prospect of Qantas falling into private equity hands was the trigger of the inquiry, which was approved in late March. He responded that the inquiry was not prompted by any one transaction but a trend that had potential repercussions. ?If private equity funds broaden their market activity substantially, they can affect large sectors of our economy. We need to assess what consequences that may have.?

Katherine Woodthorpe, chief executive of the Australian Private Equity & Venture Capital Association (AVCAL), told PEI Asia she did not think the inquiry was based on particularly negative assumptions. Private equity ?is an area that has attracted a lot of attention, having had a low profile until recently and this is our year of communicating, informing and educating,? she said.

Murray acknowledged there have been some assumptions, both good and bad, about private equity ahead of the inquiry but said he did not wish to make a judgment on the asset class ahead of a report due on 20 June.

The report will assess: domestic and international private equity trends and their effects on capital markets; whether the Australian economy would be affected by significantly altered ownership, debt/equity and risk profiles of local businesses; government revenue effects arising from consequences to income tax and capital gains tax; whether there is appropriate regulation or laws governing private equity acquisitions, especially when national or strategic interests are at stake; and the appropriate overall regulatory or legislative response required in relation to private equity.

?Private equity funds are legitimate market participants that add variety and choice to investment vehicles. But Australia has to be aware of the higher risk they can bring to some markets,? Murray said.

Meanwhile, Woodthorpe noted: ?There have been a number of commentators who are hysterical?, adding that this had stoked fears. The Senate inquiry, she stressed, is aimed at fact-finding in order to allay unwarranted concerns.

Carlyle completes China deal
The Carlyle Group has paid $80 million to take a 49 percent stake in Yangzhou Chengde Steel Tube, a China-based supplier of seamless steel pipes to the construction and energy industries. The investment was made from Carlyle Asian Partners II, a pan-Asian ex-Japan $1.8 billion buyout fund.

China has proved to be a challenging market for Carlyle, which has been struggling to obtain the go-ahead to close its first buyout in the country. In October 2005, the firm agreed the $375 million acquisition of an 85 percent stake in Xugong Construction Machinery. Eighteen months later, the planned stake was reduced to 45 percent after being trimmed back from 50 percent late last year as regulatory approvals failed to be forthcoming.

?It has become a face-saving transaction for both sides,? one Beijing-based source said of Xugong. Carlyle has declined to comment on the status of the acquisition.

Separately, he added that Carlyle's bid to buy a small stake in Chongqing City Commercial Bank is likely to be rejected because of concerns that buyout firms may not be able to add enough value to banks.

Lone Star selling in Korea
US private equity group Lone Star Funds intends to sell two Korean companies in its portfolio, fuelling speculation that it is looking to withdraw from the country altogether following ongoing scrutiny of its 2003 investment in Korea Exchange Bank (KEB).

Lone Star said it had appointed ABN AMRO to handle the sale of StarLease, a car rental group it has owned since 2002, and building firm Kukdong Engineering & Construction, which it bought in 2003.

Lone Star chairman John Grayken said: ?As the companies have been restructured, it is now time for them to be sold to a strategic buyer. This is a very normal and usual step in the investment cycle of a private equity fund.?

Korean prosecutors have accused Lone Star of conspiring with KEB's management to illegally acquire its stake at a low price by exaggerating the bank's financial weakness. The dispute has already forced Lone Star to abandon the proposed $7.3 billion sale of its stake to South Korea's Kookmin Bank.

KKR in S$1bn Singapore take-private
Kohlberg Kravis Roberts has agreed to acquire Singapore-listed MMI for S$1 billion ($665 million).

KKR has proposed to buy all ordinary shares in MMI at S$1.65 a share, which represents a premium of 51.3 percent to MMI's 12-month volume weighted average price, and a 16.2 percent premium to MMI's closing price on 8 February, prior to the company announcing KKR's expression of interest.

Founded in 1989 by Tan Choo Pie and Teh Bong Lim, MMI was listed on the Singapore Stock Exchange in 1997. Its two core businesses are a contract manufacturing group, which makes precision engineering components, and a systems division, which makes capital equipment. MMI has manufacturing facilities in Singapore, Malaysia, China and Thailand.

Merrill Lynch partners PEP in Australian foray
Merrill Lynch has joined forces with Pacific Equity Partners to make its first foray into the Australasian private equity market, with a A$814 million ($659 million) offer for Australia-listed Veda Advantage.

The private equity sponsors have offered to acquire Veda at A$3.61 per share.

The company, which has current debts of A$149 million, provides credit checks for banks, mobile phone operators and credit-card firms.

An independent advisor has been brought in to ratify the price, but Veda chairman Glenn Barnes said the deal represents good value for shareholders.

Intel invests in Chinese TV reception
Intel Capital has led a $40 million investment round for Legend Silicon, a Chinese digital circuit manufacturer that aims to provide better television reception in China.

The venture investment arm of Intel Corporation is investing from Intel Capital China Technology Fund (ICCTF), a $200 million investment vehicle launched in mid-2005. Legend Silicon will use the investment to develop digital TV demodulation circuits that will satisfy new Chinese broadcasting requirements. Its technology aims to provide reception for a range of portable devices which includes media players, smart phones and laptops.

CCMP, Teachers acquire Yellow Pages New Zealand
CCMP Capital Asia and Teachers Private Capital, the private investment arm of Ontario Teachers Pension Plan, have agreed to acquire Yellow Pages Group from Telecom Corporation of New Zealand for NZ$2.165 billion ($1.54 billion).

The transaction values Yellow Pages at 13.6 times the company's earnings for 2006.

CCMP and Teachers, a limited partner in CCMP's fund, will each take a fifty percent stake in the directories business.

To win the auction, the pair beat the likes of CVC Asia Pacific, Kohlberg Kravis Roberts, and a consortium comprising Pacific Equity Partners and Bain Capital.

Teachers' Private Capital previously partnered with KKR to acquire Yellow Pages in Canada, while CCMP joined forces with CVC in the $127 million acquisition of Singapore's Yellow Pages in 2003.

The winning consortium submitted the cleanest deal structure, including a preferential allotment for shareholders of Telecom, according to a CCMP Asia spokesman.

TPG eyes stake in Indian budget airline
TPG has been identified as one of three candidates in talks with Air Deccan to acquire a minority stake in India's second-largest airline. This is the second Indian carrier TPG has expressed its interest in, after valuation differences prompted it to walk away from taking a stake in rival airline SpiceJet.

Air Deccan recently mandated Edelweiss Capital to raise $100 million ? in exchange for a reported 5 to 7 per cent stake ? to fund expansion.

?Edelweiss has shortlisted three to four players who are willing to invest in Air Deccan. A deal is likely to be signed in the next 10 days. Among four players, Texas Pacific has emerged as an aggressive player,? Business Standard, an Indian daily quoted unnamed sources as saying in April.

With 43 planes, Air Deccan operates 300 flights daily, and has the largest network in India covering 61 airports.

In our March edition, in the article entitled “Playing the long game” on p. 33, we erroneously quoted Walid Musallam, a managing director at The Carlyle Group, saying that the firm would invest in Iran. In fact, Carlyle does not intend to invest in Iran.We apologise for the mistake.