The Week in Carlyle

The Carlyle Group had a busy week.  According to news reports, Carlyle:

May invest in Indian hospitals (WSJ)

Took an equity stake in PixelOptics, maker of innovative eyeglass that retail for $1,200 (Roanoke Times)

Financed European deals with cheap, plentiful leveraged loans (Bloomberg)

Joined two other PEU's in bidding $2 billion for CitiFinancial, rebranded OneMain (FT)

Affiliate Moncler SpA filed for an IPO on the Italian Stock Exchange (DowJones)

Affiliate Allison Transmissions hosted President Barack Obama.  It's the latest Presidential pilgrimage to an Allison facility (Detroit News)

Invested in ADA Cosmetics, a supplier of cosmetics and accessories for the hotel industry. Products are offered to premium hotels in Europe, Asia and the Middle East.  (Unquote)

Decided it didn't need the Texas Legislature to give it rate charging authority for their Galveston Port deal (Galveston Daily News)

Tried to convince Los Angeles World Airports that it had the right strategy to turn around Ontario International Airport.  (Press Enterprise)

Helped joint-venture partner Seaspan get an upgrade by Jeffries.  The billion dollar JV is for Chinese ships. (Benzinga)

Benefited from ExxonMobil's agreement to pay $18 million to clean up Connecticut rest areas, a 35 year Carlyle concession. (Stamford Advocate)

Closed the $6.1 billion deal monetizing ManorCare's nursing home facilities (CityBiz Real Estate)

Saw strong investor interest in Booz Allen Hamilton.  Carlyle holds 77% of BAH's common stock after the IPO.  (American Banking & Market News)

Co-founder David Rubenstein chaired a gala honoring global leaders who embrace openness. (Bisnow)

As for openness, Rubenstein is yet to reveal the amount of Gadhafi cash his PEU holds via the Libyan Investment Authority (LIA).  When he does speak, one must also be mindful of Rubenstein's propensity for puffery.

Update 8-6-11:  Carlyle parlayed their investment in PixelOptics into Elenza, an intraocular lens maker.

Texas Gov. Rick Perry: PEU Venture Capitalist

Governor Rick Perry can make equity investments in private companies through the Texas Emerging Technologies Fund.  This is in addition to grant monies the Governor awards.  A Senate bill updates the reporting requirement, but does not have Perry showing his investment performance.  

a brief description of the equity position that the governor, on behalf of the state, may take in companies receiving awards and the names of the companies in which the state has taken an equity position.

Governor Perry's 2011 TETF report states:

The Texas Emerging Technology Fund has made awards under Subchapter D, Incentives for Commercialization, to recipients that included the issuance to the Office of the Governor, on behalf of the state, of either:

• a warrant exercisable to purchase shares of common stock of the company receiving the award, subject to the occurrence of certain vesting events; or

• a right to purchase shares of common or preferred stock of the company receiving the award, subject to the occurrence of certain vesting events.

The bill heads to the House, which failed to hold Perry accountable for problems with the Emerging Technologies Fund or prior excesses with a sister fund, the Texas Enterprise Fund. Ironically, Governor Perry tapped the Rainy Day fund for his corporate welfare projects.

Governor Perry has the skills to work for a shadowy, private equity underwriter (PEU).  When will he do so?  My guess is it will be after his Presidential run.  There's bigger payola to share with donors.

Update 4-12-11:   The Texas House will consider a bill incentivizing solar projects in Texas by charging a fee on residential, commercial and industrial electric bills.  It's expected to provide $300 to $400 million in rebates to solar producers over a five year period.  The logic is:  "Our goal is, we want to see these companies come to Texas. But these are people who, if we don't create the program, they will go somewhere else and these other states will reap the benefits of the sales tax, the sales dollars and job growth."  Isn't that what the Texas Enterprise Fund and Texas Emerging Technology Fund are for, incentivizing firms to come to Texas?

Libyan Rebel Oil Shipment Leaves Port

Lloyd's List reported a 1 million barrel shipment of rebel oil left Libya on April 6. The last shipment of Gadhafi oil left on March 18.  U.S. led airstrikes began March 19.   The rag tag group of rebels is surprisingly sophisticated, at least corporately:  They established a Central Bank and Rebel Oil Co. within days of the UN authorizing the imposition of a "no fly zone."

Arabian Business reported:

The rebel-led government said it had concluded a deal with Qatar to market crude oil and had discussed plans with a UN envoy to exempt its oil exports from sanctions that have been imposed on Gaddafi entities.

Rebels will need a bank to facilitate the movement of $100 million shipment aboard the Equator.  George Prokopiou expects payment for the use of his ship.  Might the bank be the Arab Banking Corporation?

Update 4-24-11:  Bloomberg reported the shipment garnered $120 million for the Rebels.

ERRP Payments & Campaign Donations

 Obama's victory in the 2008 general election was aided by his tremendous fund-raising success.

A number of President Obama's top donors received ERRP checks from the federal government.  ERRP stands for Early Reitree Reinsurance Program.  It's a $5 billion pot of money which effectively takes on employer's retiree health care risks, at least a big chunk of it.

. . Early Retiree Reinsurance Program Recipient ERRP Payments as of 3-31-11 2008 Obama Campaign Contributions (PAC) ERRP Return on employee contributions . . GE $36,607,818 $499,130 7334% . Skadden Arps $102,819 $530,839 19% . Harvard University $441,297 $854,747 52% . Citigroup $1,767,406 $701,290 252% . JP Morgan Chase $2,922,102 $695,132 420% . IBM $12,989,690 $528,822 2456%

It's a tale of two lists, donor and ERRP recipients.GE paid no federal taxes the last two years, while getting their $36.6 million ERRP gift.  How much will GE CEO Jeff Immelt pony up for insider access to the White House?  We'll soon find out.

"No Taxes" GE Gets $36.6 million ERRP Check from Uncle Sam

For the second year in a row General Electric reported billions in profits, yet paid no federal taxes.  It turns out Uncle Sam did more than not collect taxes from GE.  It sent $36.6 million, i.e. someone else's taxes, to GE under the Early Retiree Reinsurance Program (ERRP). 

"Not mean, not greedy" Immelt is only doing what's allowed under the law.  Jeff, actions speak louder than words.

Citi Thinks

Citi CEO Vikram Pandit cited statistics and projections in his investor presentation.  The middle class in China and India will balloon by 2014.

Note the Middle Class is defined as households making over $10,000 per year. The U.S. remains relatively stagnant on this measure through 2014.  This means Citi will pursue global opportunities in emerging markets.  

Trade flows show emerging markets on a rocket ascent since 2000:

Guess who else had a banner decade?

Citi is selling CitiFinancial, its U.S. consumer finance arm.  Bidders include a plethora of private equity underwriters. The Carlyle Group is amongst the bidders.  Funny, the Bush years don't feel over...

Update 4-9-11:  Three PEU groups bid roughly $2 billion for CitiFinancial, since rebranded OneMain.  One group has Carlyle, Blackstone and Brysam Global Partners.  Another has Apollo and J.C. Flowers.  The final bidder is Onyx and Clayton Dubilier & Rice.

Scranton Sisters Sell Mercy

A judge cleared the way for Catholic Health Partners' sale of Mercy hospitals in Scranton, Nanticoke and Tunkhannock, Pennsylvania.  For-profit Community Health System (CHS) paid $150 million for the three hospitals and associated clinics, while promising to invest $68 million in capital improvements over a five year period. 

CHS didn't take all of Mercy Health Partners.  It left $214 million in Mercy liabilities with Catholic Health Partners.  It's not clear if these are pension agreements, retiree healthcare, professional contracts or professional liabilities.  I'm sure the judge and attorney general have the details.

The news provided details on the use of $68 million in capital

CHS Division President Martin Smith said he sees the need for renovations to Mercy Scranton's emergency room and updated equipment in the hospital's catheterization laboratory.

Emergency rooms are a high cost avenue for treatment.  Cardiac cath labs fit in the same category.  It doesn't bode well for health care costs decreasing anytime soon.  CHS had this to say at a Barclay's Capital conference in March:

ER Strategy: “The Front Door” of CHS’ Hospitals:

Initiatives
Renovations/Expansions – 54 projects completed, several currently under way
Marketing Programs - ER+
ProMed – Emergency room data tracking, quality management and measurement tool
Discharge call back implementation

Results
Improved patient satisfaction
Contributed to same store admission growth

CHS's total commitment of $218 million vs. CHP's $214 million Mercy liabilities makes this a fire sale. The deal echoes Cerberus Capital's acquisition of Caritas Christi Health System. 

Community Health System committed to keep Mercy's Catholic mission.  It's not clear if they have a buyout clause like hellhound Cerberus.

Company officials said the Catholic and charity care policies at Mercy will remain in place.  

What is Mercy's historical level of charity care?  CHS states they gave 3.7% in charity care in 2010.  Did they make any concrete commitments to serve Mercy's charitable mission?  Here's one hint they're backing away:

As part of the sale agreement, two new foundations will be formed to help people who can't afford the health care they need.

Mercy's CEO Kevin Cook provided details on the foundations while praising his new partner:

CEO Kevin Cook. “In CHS we found not only a financially strong and operationally experienced hospital system, but an organization that respects our Guiding Principles and shares our commitment to improve the health of the community.”

 As a result of the sale, approximately $25 million of charitable assets will be maintained in the area. Catholic Health Partners (CHP), the parent company of MHP, has committed to provide approximately $20 million (based on the projected price and after all liabilities are satisfied) between two local, non-profit foundations.

One foundation will be created and governed by local community members from the current Boards of MHP, Tyler Health System Foundation and Mercy Healthcare Foundation. The foundation will receive the $2 million donation from a subsidiary of CHS and will retain oversight for the existing $3.5 million in the Mercy Healthcare Foundation.

A second foundation will be created and governed by the Sisters of Mercy, Mid-Atlantic Community, the original sponsors of MHP, to focus on providing services that develop healthy communities and support the well-being of poor and under-served persons.

That doesn't exactly sound like paying for care needed by poor persons.  It's a shame CEO Kevin Cook won't stick around to clarify.

Look for more nonprofit community hospitals to sell out, a concern I voiced over a year ago. The prospect has CHS CEO Wayne Smith salivating:

"We continued to expand our portfolio of hospitals in 2010 with a very selective acquisition strategy. We believe there are a growing number of independent hospitals that fit our criteria and can benefit from having a proven operator manage their facilities. With the ongoing uncertainties in the economy, and especially with respect to healthcare regulation, we believe there are even greater opportunities ahead for Community Health Systems to make suitable acquisitions."

Suitable?  In the case of Mercy, it was a three piece suit, Scranton, Nanticoke and Tunkhannock.  It will soon be part of CHS, which stated in its last earnings release:

The Company's guidance does not take into account resolution of certain pending government investigations and lawsuits.

In such a case, it helps to own a chunk of Mercy.