Sunday, February 20, 2011

Diageo Nears $2.5 Billion Deal With Turkish Spirits Maker

According to Wall Street Journal, Diageo PLC is close to acquiring Mey İçki of Turkey for between $2 billion and $2.5 billion, people familiar with the matter said, a deal that would give the U.K. alcohol giant access to a vast distribution network in the fast-growing nation. TPG bought the previously state-owned company for about $800 million in 2006. This would be a very sweet 3x exit for TPG in just about four years.

Barring a last-minute snag, the deal is set to be announced Monday, the people said. Mey's owner, U.S. private-equity firm TPG Capital, had been considering an initial public offering for the business.
Diageo and other foreign liquor companies have been in a six-year customs dispute in Turkey, which caused Diageo to halt shipments to the country for the past six months. Liquor importers have been asked to pay more customs tax on spirits imported into Turkey between 2001 and 2009. Diageo's custom-tax bill could exceed £100 million, or about $160 million, according to the company's annual report.
But the dispute appears to be approaching a resolution, recently approved by the Turkish Parliament, and that likely helped convince the London-based company to go forward with the Mey deal. Diageo said the Turkish government announced a proposed restructuring of the country's public receivables law in November 2010, a move that the spirits giant says should pave the way to a settlement of the outstanding tax claim.
Diageo and many other big Western companies are eager to push into faster-growing developed markets around the world.
Buying Mey would hand Diageo a dominant brand and greatly expand its footprint in Turkey, which the company could then use to sell more of its flagship products, such as Johnnie Walker whisky.
Mey has access to roughly 50,000 retail outlets in the country and a nearly 80% share of the Turkish market for raki, an alcoholic beverage considered the national drink. Mey also produces vodka and gin, as well as flavored liqueurs.
Besides Johnnie Walker, Diageo's products include Tanqueray gin and Smirnoff vodka. Roughly two-thirds of its sales come from the developed world, and the company is intent on shifting that balance.
With cash flow running at more than £3 billion a year, analysts have been eager for signs of its acquisition strategy. Besides Mey, much speculation has centered on the big liquor portfolio of Fortune Brands Inc. of the U.S., which is in the process of splitting up.
Diageo hasn't mounted a major acquisition in some 10 years. But lately it has shown a fondness for expanding in spirits in developing markets. As part of a joint venture in China for example, Diageo produces the Shui Jing Fang brand of baijiu, a white spirit that the company says accounts for half of China's alcoholic-beverage consumption by volume.
For TPG, Mey likely will produce a strong return. TPG bought the previously state-owned company for about $800 million in 2006.
Diageo is being advised by UBS AG on the deal.
J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. are advising TPG.

Wednesday, February 16, 2011

How to Make M&A Work in Emerging Markets?

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Are Technology M&A Prices Getting Out Of Hand?

Here is an interesting article from today's Wall Street Journal. We have heard many bidding wars among tech titans last year with multiples exceeding 6 times revenues. I don't understand why anyone would be shocked at such hefty premiums when most Fortune 500 firms spent last several years in religious cost-cutting including research & development and innovation. I tend to think Oracle and IBM have been the most disciplined deal makers.

Cash-rich technology companies are increasingly scouting start-up acquisition targets, but prices may be climbing too high for some buyers’ tastes.

Executives speaking Tuesday at a conference held by investment bank America’s Growth Capital in San Francisco say they’re starting to get wary of sky-high valuations as they shop for start-ups, though they don’t appear to be pulling back. “Transaction multiples are really getting way up there,” said Monty Gray, director of mergers and acquisitions at SAP AG.

Business software giant SAP paid a hefty $5.8 billion last year for fellow software maker Sybase Inc., and in recent years has stepped up its acquisition pace of start-ups after historically growing organically. It plans to continue its start-up acquisition binge, but only if the price is right.

“Every year there’s a couple of competitive deals that drastically skew the multiples in the market,” Gray said. “We’re sensitive when there’s a given topic that will have high multiples that are well-known–we know that going in.”

The median acquisition size of venture-backed companies soared to $95 million in the fourth quarter, the highest three-month total since the fourth quarter of 2009 and the second highest since the second quarter of 2000, according to Dow Jones VentureSource. That brought the 2010 median total up to $46 million, the highest since 2007.

Jeff Becker, a partner at investment bank America’s Growth Capital, told VentureWire recently that the upward trend should continue. “Everyone agrees that the level of activity has picked up since the summer,” he said. “Bigger players are being more active and back to playing offense.”

With valuations generally higher than they were two years ago, venture capitalists are more willing to part with companies, leading to more M&A deals in the $50 million to $200 million range.

Ken Gonzalez, a senior vice president of corporate development at McAfee, said the run-up in acquisition prices has put a damper on transactions. “Last summer there were a lot of big deals with a lot of big multiples. The average tech transaction multiple in the first and second quarter (of 2010) was 2x trailing (revenues) which went to 6 times trailing in the last quarter of 2010.”

Gonzalez then jokingly gestured to panelist Ted Schlein, a managing partner a venture firm Kleiner Perkins Caufield & Byers. “He says I’m cheap,” Gonzalez said. “I say I’m disciplined.”

Antivirus software maker McAfee itself is in the process of being acquired for $7.68 billion by Intel Corp., an active buyer of start-ups.

In another panel, executives discussed the value of using earn-outs when an acquirer cannot see eye-to-eye with a target about its growth prospects.

“In some deals it make sense, in some it would be a disaster,” said Elaine Paul, senior vice president of corporate strategy at Walt Disney Co. “Where it can be a useful tool is when there’s big price expectations based on future growth, but you’re not necessarily comfortable paying for that upfront.”

Nish Jain, a director of corporate development at Adobe Systems Inc., said his company tends to stay away from earn-outs, while Mike Foley, a vice president and head of corporate development at Electronic Arts Inc., said it depends on the company and the type of technology.

“If it’s about accessing a new platform, in that case an earn-out can work,” Foley said. “You have to do it very carefully. It can end in litigation. Getting the incentives aligned is very important.”

Meanwhile, Zynga Inc.’s head of corporate development, Terence Fung, said he’s “not a big fan of earnouts,” while Jain of Adobe said his company tends to stay away from earn-outs as well.

Sunday, February 13, 2011

Lessons in Bold Deal Making - Chapter 11 for Borders, New Chapter for Books

A sad but truly remarkable story for Borders seeking Chapter 11 protection. The prevalence of mobile publishing platforms such as iPad, Kindle and Nook has aggressively transformed the entire value chain for publishing and selling books.
Borders not only could it not move fast enough into e-books but also made a huge mistake of transferring its internet operations to one rival who has put itself into bankruptcy. Amazon now sells more e-books than paper originals online thanks to wildly successful Kindle aggressively priced for mass market. Rather than expanding overseas, Borders should have aggressively reinvented itself by bought online merchandisers and investing in its own e-reader via partnerships with Sony and other OEMs.
The future of brick-and-mortar bookstores will look more like specialty retailers focused on selling not just books but any popular merchandise with highest return on investment on leased area.
Borders Group Inc. is in the final stages of preparing a bankruptcy filing, clinching a long fall for a company with humble beginnings that helped change the way Americans buy books but failed to keep pace with the digital transformation rocking every corner of the media landscape.
The troubled Ann Arbor, Mich., bookseller could file for Chapter 11 bankruptcy-protection as soon as Monday or Tuesday, paving the way for hundreds of store closings and thousands of job losses, said people familiar with the matter.
Borders has abandoned efforts to refinance its debts, and is preparing bankruptcy papers and seeking financing agreements that would keep it operating during the Chapter 11 restructuring process, the people said. Its shares tumbled 33% to 25 cents apiece in 4 p.m. New York Stock Exchange trading after The Wall Street Journal reported its plans.
"Borders is not prepared at this time to report on the course of action it will pursue," Borders said in a statement.
Borders's finances crumbled amid declining interest in bricks-and-mortar booksellers, a broad cultural trend for which it offered no answers. The bookseller suffered a series of management gaffes, piled up unsustainable debts and failed to cultivate a meaningful presence on the Internet or in increasingly popular digital e-readers.
Its online struggles proved critical as consumers became accustomed to getting books mailed to their doorsteps or downloaded to handheld electronic devices. Among Borders's biggest missteps were decisions to transfer its Internet operations to Inc. about a decade ago, and a stock-buyback program coupled with overseas expansion that swelled the company's debt.
Now, Borders is preparing for a costly and time-consuming trip through bankruptcy court, where it will seek to close about a third of its 674 Borders and Waldenbooks stores, the people familiar with the matter said. Borders also would cut swathes of its 19,500 staff as it attempts to reinvent itself to compete with Amazon and its hot-selling Kindle reader, and Barnes & Noble Inc., the nation's largest bookstore chain and maker of the Nook e-reader.

Whether it can restructure and emerge as a stand-alone company is unclear. Many Wall Street bankers and lawyers who have studied the chain believe it may not be able to avoid liquidation. It is expected to report more than $1 billion in liabilities in its bankruptcy petition, said a person familiar with the matter.
Online shopping, and the advent of e-readers, with their promise of any book, any time, anywhere, and cheaper pricing, have shoppers abandoning Borders and Barnes & Nobles bookstores as they did music stores a decade ago.
"I think that there will be a 50% reduction in bricks-and-mortar shelf space for books within five years, and 90% within 10 years," says Mike Shatzkin, chief executive of Idea Logical Co., a New York consulting firm. "Book stores are going away."
In towns and cities across America, consumers will soon have fewer places to discover new books. "I know that there is a lot of buying online, but I like crawling through the stacks and holding a book in my hands," says Jim Nottingham, a business development consultant who lives in Millwood, N.Y., and shops at the Borders store in nearby Mount Kisco. "I feel like Lemony Snicket in 'A Series of Unfortunate Events."'
People familiar with Borders's plans said the company wants to restructure in bankruptcy court with a goal toward remaining a viable business. The terms of Borders' bankruptcy financing are intended to help it avoid the fate of retailers such as Circuit City Stores Inc., which was forced to liquidate after seeking bankruptcy protection during the height of the financial crisis.
Borders is nearing a deal for so-called debtor-in-possession financing, which would keep the company operating in bankruptcy, the people said. The company is hearing pitches from Bank of America Corp. and General Electric Co.'s finance arm for about $450 million in financing, the people said.
Borders also is in talks with lender GA Capital LLC about converting roughly $50 million in Borders' junior debt to bankruptcy financing and contributing about $10 million in new capital, one of these people said. The company is also negotiating with other potential investors about an alternative piece of junior debt financing that would repay Borders's existing junior debt, this person said.
Among the biggest losers in the bankruptcy are shareholders, including financiers Bennett LeBow and William Ackman, whose investments in Borders likely will be wiped out. Messrs. LeBow and Ackman held more than 30% of Borders's stock as of late last year, according to Standard & Poor's Capital IQ. Mr. LeBow, who became CEO of Borders Group last year, invested $25 million last May as Borders tried to rework its finances. Mr. Ackman's Pershing Square Capital Management LP is expected to lose at least $125 million on its investment.
In December, Mr. Ackman surprised the book world by proposing that Borders bid for much bigger rival Barnes & Noble, offering to finance a deal himself. The proposal went nowhere.
Big publishers will also take a hit on books shipped and sold through the holidays. Borders in late December surprised key vendors by suspending payments. Suppliers urged the company to use bankruptcy to fix its problems; few expressed confidence in the bookseller's strategy after negotiations over outstanding debts.
A bankruptcy filing would help Amazon, Barnes & Noble and newer booksellers such as Apple Inc. and Google Inc. grab more customers. Amazon peeled off customers when Borders folded in the U.K. about a year ago. "We expect something similar will happen in the U.S.," said the head of one major publisher.
Borders's travails mark a comedown for a company with modest beginnings that grew to change the bookselling landscape. The retailer traces its roots to 1971, when two brothers, Tom and Louis Borders, opened a small used bookstore in Ann Arbor.
"What made them special was that they were a smaller family-run business," says Neil Van Uum, CEO of Joseph-Beth Booksellers Inc., which filed for Chapter 11 last year. "Smaller companies are closer to their customers than big companies."
In the 1990s, Borders spread across the U.S., part of the book-superstore movement that won shoppers by offering tens of thousands of titles in one location.
But the company didn't anticipate the looming threat of Amazon and changing consumer habits that have pushed physical stores into decline. In April 2001, Borders handed over its unprofitable Internet operations to Amazon. By the time Borders re-launched its own website seven years later, Amazon dominated the thriving online book space, building loyal relationships with millions of customers.
An aggressive stock buyback helped dress up earnings per share. But Borders took on more and more debt to fund the share purchases and its store expansion overseas, boosting total debt to $554 million for the fiscal year ended Feb. 2, 2008, from $159.4 million seven years earlier. During the same period, Barnes & Noble eliminated all its $667 million in debt.
Those dynamics caused Borders's advantages—including a savvy staff of booksellers and a wide assortment of serious tomes—to unravel.
Borders attempted to diversify its stores away from physical books to include features such as kiosks where customers could make their own CDs, download books and music, and explore their family history.
Meantime, Borders was hobbled by store leases that ranged between 15 years and 20 years. That hamstrung its ability to get out of poor locations. A revolving door of chief executives—three in the past two years plus one interim chief—whipsawed it from one business plan to another. Seeing the writing on the wall, publishers cut back shipments.
The bookseller put itself up for sale in March 2008 but failed to find a buyer. "We're small and couldn't take an enormous risk with this company," said Dominique Raccah, publisher of Sourcebooks Inc. "Some months we didn't ship at all."
Borders recently hired turnaround firm AlixPartners and has been talking to bankruptcy advisers from law firm Kasowitz, Benson, Torres & Friedman and investment bank Jefferies & Co. for several weeks.Liquidators are currently bidding to earn the right to close about 200 of Borders' stores, with an option to shutter another 50 or so on similar terms, according to people familiar with the company's plans.

AOL to buy The Huffington Post for $315 million: Lessons in Bold Deal Making

Sure this sounds like an expensive buy at 32 times EBITDA but no one can say AOL is not doing enough to transform itself from a quickly waning core business model into an online media and entertainment hub.

This bold acquisition marks a risky bet to turn the company around with  limited cash in hand. Have seen a similar bet by Xerox in buying ACS, most expensive in its history.

On the other hand, an old company like Kodak whose core business has almost evaporated in the last decade has yet to act swiftly to save itself from bankruptcy.

There are three kinds of companies: those who make things happen, those who watch things happen and those who wonder what happened.

AOL Inc will buy Arianna Huffington's influential website for $315 million, looking to the high-profile liberal pundit to rescue it from the dustbin of Internet history.
The move, announced Monday, comes at a hefty premium. AOL is estimated to be paying 32 times earnings before interest, taxes, depreciation and amortization for The Huffington Post, said Benchmark Co analyst Clayton Moran.
Similar content deals, such as Hellman & Friedman's acquisition of Internet Brands in September 2010, typically go for eight to 12 times earnings, said Moran.
"AOL just spent 40 percent of their cash for very little near-term return," said Moran.
AOL expects Huffington Post to generate around $10 million in profit before interest and taxes and see savings of around $20 million meaning it would be valued at around 10 times 2011 profits.
The Internet company's name is still a proxy for expensive mergers gone wrong following the unraveling of its $350 billion merger with Time Warner Inc in 2000. Once worth $163 billion, today AOL has a market capitalization of around $2.3 billion. Shares fell 3.4 percent to close at $21.19 on Monday.
AOL's management was eager to point out that there would be financial benefits from buying Huffington Post.
"One plus one will equal 11," AOL Chief Executive Tim Armstrong said in an interview with The New York Times.
Steve Case, the AOL executive who led the ill-fated Time Warner merger said on his Twitter account: "Really? That wasn't my experience." He later sent another tweet saying he was teasing Armstrong and Huffington and congratulated them.
Armstrong said that the deal represents an opportunity to shore up AOL's content area and that an acquisition, rather than a partnership, made more sense. "It boils down to our strategy of the Art of War," Armstrong said referencing the ancient Chinese book on military strategy revered by executives.
Huffington Post's co-founder Arianna Huffington, is often described as the doyenne of the liberal political commentary in the United States and is a regular fixture on the cable TV news circuit opining on political news of the day. She is easily recognizable for her distinct Greek accent and forthright left-of-center viewpoint.
"Tim's and my vision are so aligned it's a dramatic opportunity to accelerate what we do with Huffington Post," Huffington said in an interview with Reuters.
She will lead a newly formed The Huffington Post Media Group, which will integrate all Huffington Post and AOL content, as its president and editor-in-chief.
"I want to stay forever," Huffington told analysts on a conference call. "I want this to be my last act."
The deal also sees the return to AOL of Huffington Post's other co-founder, lead investor and chairman Ken Lerer. He had been an executive vice president of AOL Time Warner.
Huffington Post had been shopped around to other media companies as its backers had sought an exit.

Former NBC Universal CEO Jeff Zucker said at Harvard University on Monday that his company had considered buying the site.

"We tried for the last 18 months at NBC to buy the Huffington Post; we could never agree on price is why it never got done," Zucker said.

The acquisition of Huffington Post is the latest move by Armstrong to rescue AOL's dial-up Internet access business by turning it into a media and entertainment destination.


AOL suffered sharp declines in advertising sales and dial-up subscriptions in the fourth quarter of 2010, driving overall revenue down 26 percent.

About $300 million will be paid in cash in the purchase, which has been approved by the boards of directors of both companies and shareholders of The Huffington Post, though it still needs government approvals, AOL said.

The Huffington Post is expected to generate over $50 million in revenue for 2011 and at a $100 million run-rate for the next 12 months, with margins at around 30 percent, according to prepared remarks by AOL Chief Financial Officer Arthur Minson.

AOL is expected to incur about $30 million in cash restructuring charges from the deal, which is expected to be closed in the late first, or early second, quarter of 2011.

AOL executives said they forecast operating profit growth by 2013, in part because of the acquisition.

"It offers us an ability to accelerate our core strategy, (and) accelerate the advertising strategy," Armstrong said during a conference call.
The Huffington Post, started in 2005, has grown into one of the most heavily visited news websites in the United States.

"My New Year's resolution for 2011 was to take HuffPost to the next level -- not just incrementally, but exponentially," Huffington said in her blog.

She said Huffington Post decided early this year to expand into more local news coverage; launch international sections, starting with HuffPost Brazil; and increase original video content.

Who Will Buy Twitter for $10 Billion: Facebook or Google?

According to Wall Street Journal, Google and Facebook, have held low level takeover talks with Twitter that give the Internet sensation a value as high as $10 billion. While these are likely the two strategics who can most afford to take over Twitter, I have a hard time justifying $10 billion as the price tag for Twitter and $50 billion for Facebook.

In December, Twitter raised $200 million in financing in a deal that valued it at $3.7 billion. The company, which allows users to broadcast 140-character messages to groups of followers, had 175 million users as of September.

The Wall Street Journal reported on its website that executives at Twitter have held "low level" talks with executives at Facebook and Google in recent months about a possible takeover of Twitter.

Citing people familiar with the matter, the WSJ said other companies have also held similar talks.

"But what's remarkable is the money that people familiar with the matter say frames the discussions with at least some potential suitors; an estimated valuation in the neighborhood of $8 billion to $10 billion," the report said.

The paper said the talks have so far gone nowhere and that Google, Facebook and Twitter all declined to comment.

Despite the valuation, the report said Twitter's executives and board were working on building a large, independent company.

"People familiar with the situation said the company believes it can grow into a $100 billion company," the WSJ said.

Twitter, created in 2006, is among a crop of popular Internet social networking services that includes Facebook, Zynga and LinkedIn.

A growing secondary market has developed in shares of the privately held Web sensations and investors are monitoring the companies closely in the hope they might float shares.

It was only in the middle of 2010 that Twitter offered marketers a way to advertise on the service.

Industry research firm eMarketer said last month that Twitter, which doesn't disclose financial information, generated an estimated $45 million from advertising in 2010 and is expected to generate some $150 million this year.

Google, the world's number 1 Internet search engine, generated roughly $29 billion in revenue in 2010 and Facebook, recently valued at $50 billion, produced about $1.9 billion, eMarketer said.

Cross-border M&A Activity Strongest Since 2008 Targeting US, Canada and Russia

Cross-border merger activity rose to $96.6 billion for year-to-date 2011, up 59% from this time last year and the strongest start for cross-border M&A since 2008. With this week's $8.5 billion bid for Pride International (US) by Ensco PLC (UK), Petrochina's $5.4 billion investment in Canada's EnCana and the $3.2 billion transatlantic tie-up between the London Stock Exchange (UK) and the Canada's TMX Group, cross-border activity accounts for 27% of overall worldwide M&A activity this year.Companies in the energy and power, materials and financial sectors account for 60% of this year's activity, while targets based in the United States, Canada and Russia comprise nearly 50% of cross-border deals.

Here is a great summary of global deals by Reuters.

Tuesday, February 01, 2011

Who might buy Rackspace Hosting and Savvis? More Cloud Deals on the Horizon?

Will the cloud make more rain for deal makers?
The market's response to that question looks mixed after Verizon Communications announced its nearly $2 billion acquisition of Terremark Worldwide.
Companies outsource their computing needs to Terremark's remote data centers, the "cloud" in tech talk, while paying for additional services. Shares of rivals Rackspace Hosting and Savvis are up 4% and 17%, respectively, since last week's deal, struck at a 35% premium. Yet the two others still could be appealing targets, given the scarcity of fast-expanding cloud companies.
Verizon and Terremark are a unique fit, notes Raymond James analyst Frank Louthan. Both work extensively with the federal government, and Terremark also has a significant presence in South America, where Verizon is looking to expand. Rival AT&T, which already does good business selling cloud services, seems an unlikely acquirer in the area.
But other buyers could emerge. Dell might have interest in Rackspace, argues Gleacher & Co. analyst Brian Marshall, as it tries to boost growth and move further away from low margin PCs. Dell's revenue is expected to rise an average of 4% through 2012, compared with Rackspace at 22%. And as a percentage of sales, Dell's earnings before interest, tax, depreciation and amortization, or Ebitda, is just 8%, while Rackspace's margins eclipse 30%. Plus, both have a niche serving small businesses.
Rackspace isn't cheap, however. At 14 times 2011 Ebitda, it already trades just above Terremark's valuation, which includes Verizon's premium.
Meanwhile, Savvis might make a good fit for International Business Machines, because the largest chunk of each company's revenue comes from financial-services customers. While Savvis is expanding at half the rate of Rackspace, it sports 26% margins and is valued at a more reasonable eight times Ebitda.
More slow-expanding, deep-pocketed giants might be tempted to splurge.

Citigroup Takes Control of EMI

Citigroup Inc. has seized control of EMI Group Ltd. from beleaguered financier Guy Hands, acquiring 100% of the share capital on a restructuring that saw the company's debt load cut to £1.2 billion from £3.4 billion.
The transaction ends a long-running saga triggered by Hands's £4 billion buyout of the U.K. music group in 2007 through his private equity firm Terra Firma. The highly leveraged acquisition, at the height of the boom, was financed with debt from Citigroup.
After completion, the deal rapidly soured. Declines in the recorded-music market, already significant, accelerated, and the financial crisis made a debt-syndication deal all but impossible, leaving Citigroup holding about £3 billion of deal-related debt. EMI continued to struggle to meet banking covenants, while Citi has refused to renegotiate the debts.
The eventual showdown came in a New York courtroom in November when Mr. Hands failed to convince a jury that he had been duped by Citigroup into making a rich bid for EMI.
Citigroup's acquisition of EMI comes just ahead of the company's next test of its performance against banking covenant targets that EMI wasn't expected to achieve. "The recapitalization of EMI by Citi is an extremely positive step for the company," said Roger Faxon, EMI's chief executive.
"It has given us one of the most robust balance sheets in the industry with a modest level of debt and substantial liquidity. With that solid footing, we are confident in our ability to drive our business forward," he added.
EMI is also home to the Beatles and Coldplay, and it has a rich catalogue of tunes to license. As a result, private-equity firms and rival music companies are jumping at the opportunity to buy some or all of it.

Panasonic Deal Shows Beijing's M&A Power

Panasonic Corp. said Tuesday it has agreed to sell a battery business to a Chinese company for about 500 million yen ($6.1 million) to comply with a Chinese antitrust ruling, highlighting Beijing's growing influence over major global M&A deals.
When the Japanese electronics giant took a majority stake in Sanyo Electric Co., a smaller Japanese electronics maker, in December 2009, it had to agree to address Chinese concerns that the combined entity would be too dominant in China's market for nickel-hydride car batteries.
A Panasonic spokesman said the regulator did not require that Panasonic sell to a Chinese company. Still, the deal structure gives the China-based battery maker that is buying the facilities a new foothold in Japan. Panasonic has already reduced its participation in a car-battery venture with Toyota Motor Corp., also to address Beijing's concerns.
Under an antimonopoly law that went into effect in August 2008, China's Ministry of Commerce reviews deals for their impact on the country's economy. So far, it has ordered adjustments to only a handful, but the government is expanding the scope of its scrutiny to include rules on monopoly pricing that went into effect Tuesday.

Rising Rates Fuel Boomlet in Buyouts

A flood of cash by investors seeking to profit from rising interest rates is having an unintended effect in the deal world, where this money is being recycled into corporate buyouts.
Investors have been selling bonds, which typically lose money when interest rates increase, and putting their cash in funds that invest in bank loans that finance corporate buyouts. The loans have floating rates, so the interest they pay investors rises as rates go up.
Individuals and institutions pumped about $6 billion into these funds in the fourth quarter of last year, almost doubling the previous quarterly record set in 2004, according to Lipper Inc. The pace accelerated this year, with investors pouring in about $3.4 billion as talk of inflation pushes rates higher.
That inflow helped fuel $7.9 billion worth of new leveraged buyout loans January, the biggest month since January 2008 when volume hit $11.3 billion, according to Standard & Poor's LCD.
Among the deals funded by this wave of investor money is KKR & Co.'s $5.3 billion deal for Del Monte Foods Co., the biggest buyout since 2008, and Carlyle Group's $3.9 billion deal for CommScope Inc. Leveraged buyouts are typically funded by a small portion of equity from the buyout firm, and a bigger slice of loans and bonds.
TPG Capital LP and Leonard Green & Partners also are prepping large loans for their $3 billion purchase of clothing retailer J. Crew Group Inc. A group of bidders led by Apollo Global Management LLC recently offered about $12 billion for Sara Lee Corp., which would have required close to $8 billion of financing had it been accepted.
Increased investor interest "absolutely means we're much more confident competing in sale processes," said Adam Blumenthal, co-founder of private-equity firm Blue Wolf Capital, which specializes in transactions for smaller companies. "Sellers are confident that if we come in and say there will be a financing package on the table, it will be there."

Sanofi Talks Said to Value Genzyme at $20 Billion With Drug Fee


Sanofi-Aventis SA’s talks with Genzyme Corp. may value the biotechnology company at about $76 to $77 a share, or about $20 billion, including payments tied to sales of an experimental multiple sclerosis drug, three people with knowledge of the discussions said.
Sanofi, based in Paris, may increase its initial $69-a- share offer by about $2 in cash, said one person, who declined to be named because talks are private. The final deal may also include so-called contingent value right payments likely to be worth about $5 to $6 a share, depending on revenue from the MS drug Lemtrada, said two of the people.
A deal may happen within a week, the people said. Negotiations are ongoing and final terms may change. The companies said Jan. 31 they started due diligence. That review will focus on Genzyme’s manufacturing after a plant contamination, three people said.
Contingent value rights for Lemtrada may initially be set at as much as $6 a share, though they may ultimately pay out more than that if the medicine exceeds sales targets, one person said. If Genzyme fails to win regulatory clearance to sell the drug for MS, they would pay out nothing, the person said. Investors would be able to trade the CVR, two people said.
Bo Piela, a spokesman for Genzyme, based in Cambridge, Massachusetts, declined to comment. Sanofi spokesman Jean-Marc Podvin also declined to comment.