The Wall Street Journal-20080129-Maybe ADS Stands for Another Deal Saga- Blackstone Balks at Pact As Regulator Weighs In- -Price Is Not the Issue-
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Maybe ADS Stands for Another Deal Saga; Blackstone Balks at Pact As Regulator Weighs In; 'Price Is Not the Issue'
Full Text (668 words)For buyout firms, breaking up increasingly is proving not so hard to do.
Blackstone Group LP yesterday became the latest private-equity firm to back away from a buyout it agreed to before the credit markets soured, signaling it may not complete the $6.4 billion acquisition of transaction processor Alliance Data Systems Corp. The news sent ADS shares spiraling 35% lower.
Blackstone said the Office of the Comptroller of Currency, which regulates ADS's credit-card-issuing bank, demanded "unprecedented and unacceptable financial and operational requirements" to sign off on the deal. The buyout firm received the OCC's proposal Wednesday and informed ADS on Friday of its unwillingness to close the deal. It contends that the demands exceed its obligation to use "reasonable best efforts" to complete the deal.
ADS stock, which had already been under pressure amid fears Blackstone would walk away from the deal, fell $23.12 to $42.48 in 4 p.m. New York Stock Exchange composite trading. That is well below the $81.75-a-share price Blackstone had agreed to pay for the transaction processor in May.
ADS joins an expanding line-up of companies that lost their buyout deals in the wake of the credit crunch that began last summer. They include SLM Corp., the student lender known as Sallie Mae, Harman International Industries Inc. and United Rentals Inc. The developments have shattered what once was a taboo associated with walking away from agreed-to buyouts. Indeed, in the case of the Sallie Mae deal, its erstwhile buyer, private-equity firm J.C. Flowers & Co., has told its investors it won't even have to pay the $900 million break-up fee for walking away from that $25 billion deal.
Each broken LBO has added to the recent woes of merger-arbitrage investors who bet on pending deals. In the case of Alliance Data, the biggest such investors are affiliates of hedge funds Farallon Capital Management and SAC Capital Advisors. The two funds owned 9.9% and 7.3% of Alliance Data, respectively, around the end of November, according to Securities and Exchange Commission filings. There is no indication they sold the stakes before yesterday's news. Representatives for the hedge funds declined to comment.
A person close to Blackstone says the firm still wants to complete the deal and is willing to pay the original $81.75-a-share price. Should the OCC not soften its stance, Blackstone would have no obligation to pay the $170 million break-up fee, this person added. "Price is not the issue," the person says.
ADS reiterated yesterday that there has been "no change in the company's long-term expected growth rates," a view Blackstone doesn't dispute. Still, with the stock now well below even the $63-a-share price it traded at before the buyout deal was struck in May, the market is signaling skepticism that the deal will be revived.
The OCC is demanding that the buyout firm make up for any shortfalls should the credit-card business's funding dry up, a so-called source- of-strength commitment that amounts to an unlimited liability, according to the person close to Blackstone.
ADS in a statement said it "strongly disagrees" with Blackstone's position. It disputed Blackstone's claim that the OCC has struck its "final position." The Dallas company also said the regulator isn't demanding "extraordinary measures" and that Blackstone could close the deal.
The OCC's request is "novel," said Ernest Patrikis, a lawyer at Pillsbury Winthrop who used to run the legal department at the Federal Reserve. "Regulators are going to be very conservative for the next several years," he said. "I don't think we can yet see the implications on the regulatory process of the subprime crisis. This may well be another byproduct of our time."
Even before Blackstone signaled the deal could fall apart, ADS shares were trading well below the Blackstone offer, falling to as low as $61.93 on Jan. 18. The stock had been on a steady march downward since the year-end 2007 closing date came and went, in spite of repeated statements from ADS that the deal was on track.
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Heidi Moore contributed to this article.
