KKR to Cash in on Arbor Pharmaceuticals

Reuters reported several Chines suitors are pursuing Arbor Pharmaceuticals. 

A potential deal could value Arbor at around $3 billion. New York-based KKR agreed to buy more than a quarter of shares in the company in December 2014, in a deal that valued privately held Arbor at over $1 billion, Reuters reported at the time. 

KKR did add Xenoport in 2016 for $467 million.

Buyout appetite from large pharmaceutical companies and private equity firms has pushed dealmaking in the healthcare sector to record levels this year.

For holding Arbor Pharmaceuticals less than three years KKR could make 200% gross profit.  That does not include any PEU management fees, dividend bleeding or deal fees.   I'm not sure my health care coverage is 200% worse than 2014 but it's darned close. 

A Chinese purchase should make U.S. consumers nervous, especially those who recall the deadly heparin outbreak in late 2007 and early 2008.  It came from toxic Chinese drug ingredients.

One Arbor employee advised management in June on Glassdoor:

The products ARE NOT GOOD. The supply chain is WORSE. The amount customers pay out of pocket IS HORRIFIC.

KKR will sell Arbor Pharmaceuticals but is buying WebMD for $2.8 billion.  As people can longer afford health they search the internet for information.  I'm not sure how PEU owned WebMD will change, but it won't be for the better. 

Jindal Latest Private Equity Underwriter

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The Advocate reported:

“The firm is large enough to make an impact, and the people are high quality,” Jindal writes, per the Business Report. “I have enjoyed the private equity work I have done over the last several months, and am confident this platform will allow me to help portfolio companies accelerate their growth while also making a real impact in the changing health care environment.”

According to the report, Jindal expects to primarily work with the Ares Private Equity Group.

“Given my policy background at the federal and state levels, and private sector experience, I will naturally start with a strong focus in health care investments, but will also diversify over time to other areas where I can add value,” he writes.

My health insurance turned to junk the last decade as my plan shed benefit after benefit.  A pox on politicians getting big paydays from private equity underwriters (PEU), especially those making big money flipping for-profit healthcare companies.

Bobby Jindal is but the latest in a long line of profiting politicians, both Red and Blue.  America's uni-party loves PEU.

Reader Reaction 8-19-17:  "There are so many carcasses from all the pilfering that the only game is to join the vultures. Infrastructure will be the next carve up before the space cowboys seek subsidies to infinity. Thanks. The country has gone numb and dumb."  

Carlyle Cites PEU Paradox

Carlyle Group co-founder David Rubenstein shared in a recent earnings call:

"I think, final comment, what I’d call the paradox of private equity is that returns are coming down, prices are high. There’s a lot of dry powder by normal standards. So why are so many people giving so much money to people like us? Because they see everything else being less attractive" 

What has Carlyle done in the past to earn returns for investors?  It launched Carlyle Capital Corporation during an era of high prices and lots of dry powder.  Carlyle's website states:

When The Carlyle Group created Carlyle Capital Corporation in 2006, it was designed to provide attractive risk-adjusted returns for shareholders by investing in a diversified portfolio of fixed income assets consisting of U.S. government agency AAA-rated RMBS securities and leveraged finance assets. Due to the low-risk, low-return nature of the U.S. government agency-backed securities, a large position (and thus a correspondingly large amount of leverage) was required to realize gains substantial enough to warrant the investment. At the time, this approach was time tested in the market for these types of assets.  Unfortunately, extreme volatility and market movement during this liquidity crisis created a hostile environment for CCC and similar types of vehicles.

Carlyle promised to make back investor losses:

David Rubenstein, co-founder of the Carlyle Group, on Thursday pledged to compensate investors hit by the collapse of a $22bn mortgage-backed securities fund his private equity group floated seven months ago. “We have stood behind our products in the past and we are working on ways to address the losses that are being suffered by investors,” Mr Rubenstein told the Financial Times

One investor did not fill compensated for his CCC losses and chose another route for payback, bankrolling a lawsuit against Carlyle for its representations and actions regarding Carlyle Capital Corporation.

There are other paradoxes of private equity, some identified by the business media.  I'll offer:

1.  Pension funds invest in Carlyle, which has been known to dump employee pensions as part of its takeover strategy.
2.  Family offices invest in Carlyle, whose co-founder David Rubenstein refuses to leave an inheritance to his children to establish a family office.
3.  Preferred carried interest taxation continues despite ten years of overwhelming popular support for billionaires to pay a higher tax rate than their gardener or secretary. 

The PEU industry grew mightily from the last paradox.

At a Credit Suisse forum in Miami, in 2013, Rubenstein said of private equity, “Carried interest is really what the business has historically been about—producing distributions for your investors from good sales and I.P.O.s . . . and getting twenty per cent of the profits for yourself.” He went on, “That’s how we’ve really grown our business.” 

That's how Mr. Rubenstein likes it.  America's PEU sponsored politicians kept his wish to continue carried interest despite little to no public support.  That's my PEU paradox for the week.

Update 10-4-17:  ZeroHedge wrote about PEU high prices and nearly $1 trillion in dry powder.  Lever up!

Rogoff-Rubenstein's Alaska Dispatch News Files Bankruptcy

Alaska Dispatch News reported on its bankruptcy declaration:

Alaska's largest newspaper filed for Chapter 11 bankruptcy protection Saturday evening.

In a prepared statement Saturday, Alaska Dispatch News LLC owner Alice Rogoff, who also has served as publisher, said it was a "truly bittersweet" moment for her.

The filing is a Chapter 11 bankruptcy.  Bankruptcy filings are legal proceedings.  I was not aware Alaska courts are open on Saturday evenings.

It's not Alice Rogoff's first Alaska implosion.  Rogoff, wife of billionaire Carlyle Group co-founder David Rubenstein, couldn't save her Alaska House in New York City.  It closed in 2010.

A local buyer group has been identified and committed $1 million for ADN to pay its bills, many of them in arrears.  Buyers will operate the newspaper starting Monday morning.

Rogoff paid $34 million for the former Anchorage Daily News in 2014.  The reported purchase price is "up to $1 million."

The Rubenstein's have strong Alaska connections.  Rogoff hosted President Barack Obama for dinner in her Alaska home.  Two private equity underwriters attended the dinner, one from Guggenheim Partners and the other from Pt Capital.  The Carlyle Group manages Alaska Permanent Fund money and has an interest in Hilcorp Energy, which has a significant Alaska presence.

Two of Alice Rogoff-Rubenstein's Alaska pet projects sank for financial reasons.  Her husband knows when to stop throwing good money into a sinkhole.  Carlyle did that recently with nursing home giant ManorCare and refiner Philadelphia Energy Solutions. Carlyle has $50 billion in dry powder but won't put a penny more in PES.

Lenders clearly want to tie Mr. Rubenstein and his billions to ADN debts.  When the big money boys no longer trust one another to make good on their debts it's financial crisis time.  Will ADN's failure take us one step closer to that reality?

Update 9-13-17:  Mrs. Rubenstein described her husband's patriotic philanthropy as "publicity grabs and claimed all her financier husband really cares about is making money."

Update 11-12-17:  A former ADN employee wrote about the company's demise under Mrs. Rubenstein.

Update 12-8-17:   The Rubenstein's divorced according to today's WaPo.  The article did not address how any divorce proceeds might go to make ADN creditors whole.

Update 4-16-18:  Bankruptcy court uncovered questions of possible fraud on Mrs. Rubenstein's part.  One jilted contractor asserts fraud as well.

IPOs Opportunity for PEUnicorn Founders to Cash In?

Blue Apron expected to go public between $15 and $17 per share.  It went public at $10 and closed today at $5.83.  Bloomberg and other financial media ran reports of a 24% layoff but the job reductions are but part of the picture.  Blue Apron plans to open new fulfillment centers with more jobs than those lost.

The initial S-1 revealed Blue Apron's President has private equity underwriter PEU roots:

Matthew B. Salzberg, one of our founders, has served as our president, chief executive officer, and a director of Blue Apron since inception, and previously served as our treasurer until January 2017. Before co-founding Blue Apron, Mr. Salzberg was employed as a senior associate by Bessemer Venture Partners, a venture capital firm, from June 2010 to January 2012, and as an analyst by The Blackstone Group, a private equity firm, from June 2005 to June 2008.

In June 2014, we used a portion of the proceeds from the April 2014 Series C preferred stock financing to provide liquidity to Matthew B. Salzberg, Ilia M. Papas, and Matthew J. Wadiak, executive officers of our company, by repurchasing shares of common stock from them at a purchase price of $16.6586 per share.  Salzberg sold 150,073 share for proceeds of $2,500,006.

In October 2015, Matthew B. Salzberg, Ilia M. Papas, and Matthew J. Wadiak sold shares of common stock to unrelated investors at a purchase price of $13.3269 per share, which was equal to the common stock-equivalent price at which we issued and sold Series D preferred stock in May and July 2015.  Salzberg received $22,001,899 for his 1,650,939 shares.

Currently Mr. Salzberg owns over 47 million shares of Blue Apron.  Here's the breakdown:

Consists of (i) 25,154,605 shares of Class B common stock held of record by Mr. Salzberg, (ii) 19,744,091 shares of Class B common stock held of record by Family Trust Created Under Article V of the Matthew Salzberg 2014 Annuity Trust Agreement, for which Mr. Salzberg and his father serve as co-trustees, (iii) 2,500,000 shares of Class B common stock held of record by The Matthew Salzberg Family 2014 Trust, for which Mr. Salzberg serves as a trustee, (iv) 18,759 shares of Class B common stock held of record by Aspiration Growth Opportunities II GP, LLC, with respect to which Mr. Salzberg has shared investment and voting power and (v) 3,888 shares of Class B common stock subject to options exercisable within 60 days of April 30, 2017 of which 1,944 are vested as of such date. 

Salzberg got nearly $25 million for a small portion of his stock holdings prior to Blue Apron's going public.  His $25 million came from stock sales at prices well above today's close. It's a nice gig when an executive can sell his stock on the inside at a multiple of its current share value.

It's also cool when you can hire your brother:

Shaun Salzberg Design, LLC, which is owned by Shaun Salzberg, the brother of Matthew B. Salzberg, provides software design, implementation, and related services to us as an independent contractor. For these services, we pay hourly fees and reimburse specified expenses. These services were initially provided under a consulting agreement dated October 28, 2015 and, following expiration of the agreement on October 28, 2016, have continued to be provided on substantially the same terms. To date, we have paid Shaun Salzberg Design, LLC an aggregate of $149,550 pursuant to these arrangements. 

While Bloomberg got the employment story wrong this tidbit is enlighteing:

Our tri-class capital structure has the effect of concentrating voting control with our president and chief executive officer, Matthew B. Salzberg, and the other holders of Class B common stock. This structure will limit or preclude your ability to influence corporate matters, including a change of control, and might affect the market price of our Class A common stock. 

I bet Salzberg learned it from Blackstone.  It's a PEU world. 

Carlyle Won't Use Dry Powder for PES

The Carlyle Group invested $175 million in 2012 for for two-thirds of Philadelphia Energy Solutions (PES).  The deal received public subsidies and Carlyle did a liquidity recap, loaded PES with debt to siphon off dividends.  Reuters reported:

The refinery owners enjoyed a taxpayer-funded rescue package, which included the creation of a tax-friendly zone, $25 million in grants and environmental liability waivers. 

The company took on the $550 million loan that comes due early next year in 2013 to finish capital projects and pay out dividends to Carlyle and Sunoco. 

The payouts and tax advances reached $480.9 million between 2013 and 2015, according to filings.

Now Carlyle wants to restructure the company with someone else's money.  Insiders say Carlyle hired an investment bank to help tackle PES' debt burden.  

Carlyle has been a big investor in energy and has loads of dry powder but it will not throw good money after bad, especially for an investment that has already returned a multiple of its initial equity position.  

Public subsidy, debt for dividend, and preferred taxation are all common private equity underwriter (PEU)strategies.  Carlyle is skilled at executing the first two and keeping the latter.  Carried interest taxation remains soundly in place a decade after our PEU sponsored Congress first considered removing the billionaire tax break.  Mr. Rubenstein went to Capital Hill many times to keep his preferred taxation.  He got his way as politicians Red and Blue love PEU.