Saturday, April 19, 2014

Carlyle Group Double: A Look Back at Horizon Lines

Private equity underwriters boast of their successes.  CNBC recently hosted Carlyle Group co-founder David Rubenstein with two of Carlyle's operating executives.  They bragged of doubling employment, while never offering the affiliates name (AxleTech).  In order to balance coverage I offer the PEU story of Horizon Lines.

WSJ reported in February 2011:

Horizon Lines Inc. agreed to plead guilty to a felony charge of conspiring to fix rates for marine freight transportation over a six-year period and will pay a $45 million fine, according to the Department of Justice. 

The container-shipping and intermodal-transportation company was accused of fixing rates between Puerto Rico and the U.S. from as early as May 2002 until at least April 2008.

Under the terms of the deal, Horizon Line said the Justice Department has agreed not to bring criminal charges against any current director or officer, although the pact doesn't apply to the company's current chief executive or chief operating officer.

Five former company executives received prison sentences after pleading guilty to bid rigging, price fixing and other charges in October 2008.  
Why would the Justice Department exclude board members or officers?

1,  Ex-Commerce and Transportation Secretary Norman Mineta served on the Horizon Board from 2006 to 2011. 
2.  The Carlyle Group owned Horizon Lines from February 2003 to May 2004.
3.  John Snow's CSX owned the company during the initiation of price fixing in May 2002.  John Snow became President George W. Bush's Treasury Secretary in February 2003.

The fine fell to $15 million according to a Horizon SEC filing.

On April 28, 2011, the U.S. District Court for the District of Puerto Rico amended the fine imposed on us by reducing the amount from $45.0 million to $15.0 million. 
Horizon settled with competitors damaged by their felonious acts:

Horizon Lines agreed to settle with shippers at a total cost to the company of $13.75 million in exchange for full release of all antitrust claims.  Under the terms of the settlement agreement, Horizon Lines will make a payment of $5.75 million within 10 business days of the November 23, 2011, effective date, a payment of $4.0 million by June 30, 2012, and a final payment of $4.0 million by December 24, 2012

"We are very pleased with this settlement, which brings to closure our last known major financial exposure relating to antitrust claims involving the Puerto Rico tradelane," said Michael T. Avara, Executive Vice President and Chief Financial Officer. "It also eliminates the potential for protracted and costly litigation."  
Last month Horizon announced a second settlement with the government:

Charlotte-based shipping company Horizon Lines said Friday it has agreed to pay a $1.5 million settlement in a price-fixing case brought by the federal government, the company’s most recent outlay in an investigation stretching back to 2008.

The settlement announced Friday resolves complaints from the U.S. departments of agriculture, defense and the postal service. As a result of collusion between Horizon and Sea Star Line, a Jacksonville, Fla.-based shipping company, the government was overcharged for shipping mail, food and other products, according to the complaint.

Read more here:
I wrote about Carlyle's massive profit from Horizon six years ago. The Honolulu Star chronicled Carlyle's financial windfall in May 2004.

The Carlyle Group said yesterday that it will sell Horizon Lines, one of the market leaders in Hawaii-mainland shipping, to private-equity firm Castle Harlan for $650 million -- more than double what Carlyle paid for Horizon just last year.

The Carlyle Group bought Horizon from Virginia-based rail-transport company CSX Corp. in February 2003 for $300 million when it was still known as CSX Lines and changed the name.  

Carlyle Group spokesman Chris Ullman said the equity firm, which has $18 billion under management, decided to sell Horizon Lines so soon due to Carlyle's quick success in turning it into a stand-alone shipping company. Just one and a half years after Carlyle bought it, Horizon Lines is already about to surpass a five-year goal for earnings, Ullman said, though he provided no figures.

"And that's been during a weak economic period. Imagine how well the company can do during better times. That's been a key selling point," Ullman said.

He said Horizon's hefty mark-up reflected that success and improvements in U.S. capital markets which have made it easier for Castle Harlan to leverage a deal.

That was in the early days of PEU frothiness and CSX/Horizon's price fixing.  Castle Harlan did a debt for dividend on Horizon, taking $51 million out in shareholder distributions. 

Castle Harlan took Horizon public a year later and the sad story is below.

Read more here:
What is in PEU management that causes executives to lie, cheat or steal to outperform on targets?  Carlyle examples include Synagro (bribing), ARINC (procurement violations), Horizon (price fixing), SemGroup (energy betting) and itself (several settlements for bribing). 

How does their influence induce public servants to stay silent about Carlyle companies and their role in deadly or nefarious events?  The Bush White House did it for LifeCare Hospitals (Hurricane Katrina deaths) & Landmark Aviation (rendition carrier).

Texas Governor Rick Perry repeatedly lied about Vought Aircraft's actual job numbers after giving the Carlyle affiliate $35 million in 2004 (promise 3,000, result 35).

Like the directors and officers of Horizon PEU players and their sponsored politicians skate.