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€300 Million Later: Deutsche Bank's Invoice On The Remains Of The Jefferson Smurfit Group
In January, Zero Hedge wrote about the bankruptcy of paperboard and packaging company Smurfit Stone Container Corp. As this occurred at the peak of the post Lehman crunch it was not very surprising. However, what is somewhat surprising is our recent encounter with a case study of the Jefferson Smurfit Group LBO by Morgan Stanley, in which Madison Dearborn acquired JSG for €2.3 billion, and subsequently spun off SSCC to the public. What caught our attention was the fees and expenses that the advisors charged MDP to facilitate a deal which ultimately cashed out the investor group by spinning off the eventual toxic assets of SSCC to a hapless public: Deutsche Bank and Merrill Lynch pocketed a whopping €248.5 million (yes, that's Euros). And for what: presumably for M&A fees, Loan fees, HY Bridge and Bond Fees and FX/Hedging Revenues. What they missed to point out is the primary reason for MD's generosity: extracting all the relevant assets out of a formerly stable and growing operation, spinning off all the shitty ones (eventually attempting to arrange restructuring fees and/or DIP financing on the remaining SSCC husk), leveraging the company with a massive debt load.
Not only that but a few short years later, DB again made a boatload by IPOing the JSG successor Smurfit Kappa to some other set of hapless investors: with an IPO price of €16.50, and currently trading about 70% lower, one wonders how in a span of 10 years, DB has made almost half a billion dollars while the underlying assets have deteriorated so much that the American business has had to file for Chapter 11, while the remainder is stuck picking up the pieces at a deplorable return to shareholders.
But that's investment banking for you: providing major value (to someone), while enhancing efficiency (and bankruptcy probabilities). And in the meantime, the PE backers have extracted hundreds of millions on their underlying stake. Who are the losers? Why stupid institutional money (pension and mutual funds) and retail of course. In the meantime, politicians hammer the immense value that the Wall Street advisory/underwriting/going private complex provides. If they say it often enough, we may just believe them.
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Good for Madison Dearborn, there was $ to be had, and they went at it. Just because they found a greater fool aint their fault.
I'm curious if there's a study (too lazy to check ssrn) about returns on IPO's coming off a LBO/MBO, point being, if a PE shop just extracted $500mm out of an LBO, you probably don't want to buy the equity when it comes back in the public markets (or the debt, for that matter, but whatever)
Thanks AnalYST for permission to steal all your stuff. Really, thanks. Just because your a fool for having stuff ; ain't my fault.
I'm curious if there's a study (too lazy to check) about people who have been victims of crime and how their ethical attitudes have been modified by the effect of such victim-hood?
(butthead whatever)
You know, when the cocaine runs out(or the addiction runs it's course) it's not as fun anymore (whatever).
Radio Zero, please.
From Simon Johnson - first we had Hank's and now we have
Timmay's Telephone Travesty
He was just getting eyebrow consultation. Do I pluck my eyebrows too much? Hmm do I?
Last week the Times profiled how Thomas H Lee Partners did more or less the same thing to the Simmons Bedding Company.
Ultimately the losers are the employees of the companies forced into bankruptcy by a huge debt burden, and the economy at large, since those employees will no longer stimulate the local economy with their purchases.
I'm curious to know by what legal maneuver can the LBO firms can assign the obligation to repay the money THEY borrowed to the books of the company they acquired. It would be like me borrowing money to buy a car, and then saying that the car has to pay back the money. Insanity.
Here is the link: http://www.nytimes.com/2009/10/05/business/economy/05simmons.html?dbk
I used to lend money for LBOs, its simple, the private equity firm says we want this entity to borrow money, investors look at the entity and make a decision. Everyone investing in the debt knows the PE firm is not responsible if it goes poorly. During the credit bubble people invested in LBO debt like it was treasuries.
Ponder this, you work at or are in charge of an asset manager that only loans to private equity companies for LBOs. You realize the market is insane but a pension fund calls and says they have enough equity and investment grade exposure they want to invest in leveraged loans with a couple of billion dollars.
If you make your living by investing in loans do you turn down $2 billion dollars to invest and say prices aren't right or do you say okay I'll do my best.
99.9999% of people will take the money, if it goes poorly it's not your fault, you did what the pension fund wanted you to do; get exposure to LBO loans.
This highlights the important of having smart people managing pension funds, an outside manager is never going to turn down money so when you go out to the market to invest your assets you better know what you're doing. CalPers is example number one, people who can't invest to save their lives allocating billions to real estate deals at the very peak with recourse leverage, idiotic but if you are a real estate manager you don't turn the money down.
Thanks Anon, That explains a lot. I wasn't aware of the role of Pension Funds in this macabre dance...
the non-deflationist perspective - gold, oil and inflation
Jim Willie on Max Keiser October 9
and this more extensive interview (audio) from contrary cafe
US$ Carry Trade Jim Willie
and from one of my favorite bloggers, some comments on deflation and gold
Mourning Rally - Cassandra Does Tokyo
why should we be surprised by Deutsche Bank...one of the largest banks foreclosing on American homes and businesses..they have taken a stance that they, "Do not participate in loan modification programs of any type." as per their servicer OneWestBank(formerly Indymac Bank bailed out by the US government). They, like many in their industry are out for the money, PERIOD.
Zero Hedge you are the best, a relatively minor story to many but one that has touched my life and highlights how even if they resurrect this monstrosity of a system it is destined to failure. Keep up the fantastic work!
I live in the UK and worked in our car industry as part of product design (Mechanical Engineer) for Jaguar and Land Rover, brands I loved working for but could see the troubles ahead and when the opportunity for voluntary redundancy came in 2007 I took it. I then started looking at different industries and I started to target bussiness that I felt could withstand the economic condition I knew were coming. I went for and interview at a subsidiary of Smurfit Kappa where they made recycled brown paper for the packaging industry, a robust and safe industry I felt. This story is tragic and illustrates the corruption that has infiltrated every aspect of our economy. What a disgrace, this sort of thing needs a lot more coverage, well done again for you tireless work.
Concur.
Wake up people...Where do you think all the $$$ are coming from to fund these PE guys and their dastardly deeds??? From the pension plans of the hard working teachers, doctors, policemen, state workers etc. through 'expert' intermediaries--the consultants. Since promised rates of return have been incorrectly calculated too high and realized returns have collapsed, trustees have been chasing high single digit, low double digit returns in order to make up years of shortfall. It is like the old image of the snake eating its own tail (slowly). This is done all in the name of 'more efficient capitalism'. A slow death more like it.
This is exactly the kind of story that stokes my rage at the financial "industry".
Apart from a few key functions this industry is essentially parasitical. It extracts money from the parts of the economy that actually produce an increase in value to a product or service. Yet it has grown from 3-6% of GDP to 18-22% of GDP and now captures between 40% and 70% of all corporate profits (I'm using ranges due to different estimates)
The only way this parasite has grown to such huge and bloated size is that they captured the government and regulators. They're like an AIDS virus that captures the immune system and indeed after capture makes the immune system assist in its growth.
Meanwhile, the body the supports it all has so much of its strength and energy extracted to support the parasite/virus it ends up dying.
Bernanke's monetary stimulus is like giving a blood and vitamin transfusion to keep a pateient alive who has a tumour that has consumed 20% of his body. Unless you cut out the tumour, you're just feeding the tumour.
Boise Inc., a paper company similar to Smurfit, had a similar experience and their stock was sold off and/or shorted mercilessly (52 week low of $0.02) during the financial crisis. Why? Fears of bankruptcy as they were over-leveraged in the same exact manner as Smurfit. Triggering a CDS event and the windfall profits coming from a bankruptcy would have further padded the pockets of these crooks.
Sadly we have become a nation of destruction, not creation. It's all about the money and the undying greediness of Wall Street.