Playboy said to be in takeover talks

Shares of Playboy Enterprises Inc. have surged today on a report that the company might sell itself.

The publisher’s Class B stock was up 79 cents, or 28%, to $3.65 about 11:15 a.m. PST, after Bloomberg News said brand-licensing firm Iconix Brand Group Inc. was in deal talks with Playboy.

Money-losing Playboy replaced longtime Chief Executive Christie Hefner with Scott Flanders in June, and has been looking for a potential buyer since then, Bloomberg said, citing an unnamed source. Read the full story here.

Playboy’s sales have crumbled since 2007, falling to $56 million in the third quarter from $83 million in the same quarter of 2007.

Hugh Hefner still controls the company via his 70% stake in the Class A stock. The Class B shares don’t have voting rights.

Playboy is a classic example of a company that never should have gone public, at least from investors’ point of view. Except for a spike in the share price to $33 during the dot-com frenzy of 1999, the stock has mostly been a dud for decades -- fun for savvy short-term traders, maybe, but a bomb for long-term investors.

-- Tom Petruno

Kentucky Derby track owner to buy Youbet.com

Burbank-based online horse-betting firm Youbet.com Inc. said Wednesday that it agreed to a buyout by racetrack owner Churchill Downs Inc., which also controls a rival online-betting operation.

The cash-and-stock deal is worth $127 million, though Youbet.com shareholders are getting a price well below their stock’s recent peak.

With attendance at racetracks on the decline, the merger is a bet that more people can be enticed to play the ponies online, says my colleague Nathan Olivarez-Giles, who wrote a profile of Youbet.com for The Times last week.

Together, Churchill (via its TwinSpires.com website) and Youbet.com will control about half of the online horse-betting market, Olivarez-Giles says.

Louisville, Ky.-based Churchill, which owns the racetrack that hosts the Kentucky Derby as well as other tracks in Florida, Illinois and Kentucky, agreed to pay 97 cents a share in cash for each Youbet.com share, plus 0.0598 shares of Churchill stock.

Based on Churchill’s closing stock price of $31.57 on Wednesday, that works out to a value of about $2.86 a share.

That price is a premium of 19% above Youbet.com’s closing share price of $2.41 on Wednesday, when the shares gained 19 cents, or 8.6%, for the day. The deal was announced after markets closed.

But Youbet.com shares had reached a 2 1/2-year high of $3.72 in late July, before tumbling in August.

Churchill and Youbet.com said their marriage would allow the combined firm "to pursue other online business opportunities beyond pari-mutuel wagering, should such opportunities develop."

Youbet.com earned $878,000 on sales of $27.9 million in the third quarter. Churchill lost $2.3 million on sales of $101 million, but the company makes most of its money each year in the spring quarter.

-- Tom Petruno

BofA expected to sell First Republic Bank to private-equity group

California-based First Republic Bank, which caters to the well-heeled, will finally get its freedom again after two years under the control of first Merrill Lynch and then Bank of America Corp.

TheDeal.com reported that BofA has agreed to sell First Republic to a group including private equity firms General Atlantic and Colony Capital. Price tag: About $1 billion.

BofA had been expected to jettison First Republic as the banking giant restructures and looks to bolster its capital by selling non-strategic assets. Merrill Lynch bought First Republic in 2007 for $1.8 billion; BofA then swallowed Merrill last year.

The private equity group will take about $12 billion of First Republic’s assets, while BofA will keep about $2 billion, the Wall Street Journal reported.

First Republic, headquartered in San Francisco, also has offices in Los Angeles, Santa Barbara, Newport Beach, San Diego, Las Vegas, Portland, Seattle, Boston and New York City.

-- Tom Petruno

 

House Democrats to push for tax hike on private-equity chiefs

As the fortunes of private-equity firms improve with rebounding financial markets, House Democrats are renewing a push for a long-sought tax increase on the industry.

From Bloomberg News:

Matthew Beck, a spokesman for the House Ways and Means Committee, said the panel will revive an effort to raise the 15% tax rate on “carried interest,” a term for the share of [an investment] fund’s profit that is paid as compensation to its executives.

That portion of an executive’s pay, now taxed at lower capital gains rates, would be subject to income tax rates of as much as 35%.

“There is strong support for taxing carried interest as ordinary income and I expect this issue to move forward in the coming months,” Beck said.

Managers of private-equity firms, hedge funds, venture capital firms and other investment partnerships typically use the "2-and-20" compensation structure: They earn an annual fee of 2% of assets under management and then take 20% of any profit above preset levels. The rest goes to the investor-clients who put up the capital the managers invest.

The 20% profit is known as carried interest, and is treated as a capital gain for tax purposes if the underlying return was generated on investments held more than a year.

Many Democrats say that such compensation should be classified as regular income and taxed accordingly. The House in June 2008 passed a bill mandating that change but Republican opposition scuttled it in the Senate.

Now, with Democrats in control of the House, Senate and the White House, carried interest is a ripe target as Washington looks for ways to boost revenue.

From Bloomberg:

Ways and Means Committee Chairman Charles Rangel, a New York Democrat, and other Democrats including Michigan Representative Sander Levin say [carried-interest] fees are more like wages than capital gains because executives usually haven’t risked their own capital.

Revenue from the tax proposal may be earmarked by House Democrats to help pay for renewal of tax subsidies designed to help economic recovery. For example, Rangel said lawmakers should extend an $8,000 tax credit for first-time homebuyers, and the White House is pushing renewal of an incentive that lets companies use current losses to get refunds for past taxes.

Arguing against the tax change, the private-equity industry in the past has countered that fund managers should qualify for the lower capital gains tax rate on carried interest because they "act as owners, not employees" and "bear significant economic risks."

This time around the industry also will try to play the economy card, asserting that after private-equity firms buy companies they make them better (a debatable point, to say the least).

Douglas Lowenstein, president of the Private Equity Council, told Bloomberg that as the economy begins to recover a “tax increase on growth investors with a demonstrated record of building stronger companies and creating new jobs would be exactly the wrong policy at the wrong time.”

-- Tom Petruno

Bloomberg said to be favored bidder for BusinessWeek

McGraw-Hill Cos. favors Bloomberg News parent Bloomberg LP as a buyer for BusinessWeek magazine, Reuters reports today:

McGraw-Hill is leaning toward selling its money-losing BusinessWeek magazine to Bloomberg LP, although another bidder could still make a higher offer, a person familiar with the matter said.

A deal still could take weeks, or could fall apart because of depressed magazine advertising and uncertainty in the financing market; but BusinessWeek executives think that Bloomberg would be the best fit, the source said on Tuesday.

Other bidders include private equity firms OpenGate Capital and Platinum Equity, and ZelnickMedia, owned by Take Two Interactive Software Chairman Strauss Zelnick, Reuters said.

McGraw-Hill put BusinessWeek up for sale in summer, and apparently has attracted the interest of more than 90 potential buyers.

BusinessWeek media writer Tom Lowry reports on the magazine’s website today that Bloomberg "appears to be the most aggressive in its pursuit of BusinessWeek. Norm Pearlstine, Bloomberg’s chief content officer, held discussions last week, in person and over the phone, with BusinessWeek’s top editors."

And more from Reuters:

McGraw-Hill considers Bloomberg, a privately held provider of news and financial data, as the best buyer for BusinessWeek because it could capitalize on the marriage of two brand names well known in financial circles, the sources said.

Bloomberg owns Bloomberg Markets, a financial news magazine that produces feature stories that often run much longer than the shorter pieces on the Bloomberg newswire.

That magazine and BusinessWeek could be blended to make a title that would expand Bloomberg's presence beyond its financial data clients and reach a mainstream online audience.

-- Tom Petruno

SEC a sloth on crime? Not in this case

The Securities and Exchange Commission, forever criticized for being too slow to ferret out Wall Street crime, reacted with lightning speed this week to signs of insider trading ahead of a big merger deal.

The agency today charged a Texas man with illegally reaping $8.6 million by buying option contracts of Perot Systems Corp. before Dell Inc. announced its takeover of the firm on Monday, then dumping them.

The defendant, Reza Saleh, works for Perot Investments Inc. and Parkcentral Capital Management, private firms affiliated with Perot Systems. Parkcentral is the investment firm of H. Ross Perot, who isn't implicated in the case.

From Reuters:

According to a complaint filed on Wednesday with the federal court in Dallas, Saleh, 53, bought 9,332 call option contracts on Perot through two TD Ameritrade brokerage accounts between Sept. 4 and Sept. 18, after learning about merger talks through his employment.

The SEC said the Richardson, Texas resident sold the contracts after the $3.9 billion takeover was announced on Monday, resulting in the illicit profit.

"What's significant here, clearly, is the amount of money," said Rose Romero, regional director for the SEC's office in Fort Worth, Texas, in an interview. "It's incredible. It's a lot of money for a single individual to realize."

Saleh did not immediately return a call seeking comment, Reuters said.

News reports on Monday noted that trading in Perot Systems options contracts had surged before the deal was announced, suggesting that someone had been tipped off.

Nothing like calling attention to yourself by buying in bulk . . .

-- Tom Petruno

Takeover deals pick up as execs get bolder

The stabilizing economy and rising stock market are spurring a budding recovery in the previously lifeless corporate merger market.

In another sign that executives are feeling confident enough to greenlight big deals, Dell Inc. on Monday said it agreed to buy technology services firm Perot Systems Corp. for $3.9 billion in cash.

That follows Walt Disney Co.’s $4-billion deal for Marvel Entertainment Inc. last month and Kraft Foods Inc.’s $16-billion hostile bid for rival Cadbury PLC two weeks ago.

The uptick in takeover activity is a welcome sight on Wall Street, where investment bankers have pined for the juicy fees derived from putting companies together.

"You had a lot of people in Manhattan who were not all that busy over the last six months or so," said Andy Levine, a partner in the mergers and acquisitions practice at Jones Day in New York. "There’s a lot of relief that it’s coming back."

And for the stock market overall, a boost in takeover activity provides another pillar of support for share prices. Perot Systems jumped $11.65, or 65%, to $29.56 Monday, and the tech-heavy Nasdaq composite edged up 0.2% to 2,138.04, nearly a one-year high, on an otherwise weak day for the market.

Still, we’re a long way from the furious dealmaking of a few years ago. August was the slowest month for merger announcements in five years, according to researcher Dealogic.

Year to date, U.S. companies have announced deals worth $494 billion, down from $913 billion at this point last year, according to Dealogic. The total stood at $1.3 trillion at this point in 2007, when abundant credit lubricated deal flow.

Several factors are driving the merger boomlet. The improving global economy is generating more confidence in corporate boardrooms. The soaring stock market has convinced some executives that potential quarry won’t get any cheaper. And companies that had been hoarding cash for safety’s sake now are looking for ways to boost earnings in what’s expected to be a slow-growth environment.

While financing is available for sensible deals, however, there has been no return to the use of excessive leverage or exotic financing techniques, experts say.

One potential obstacle to a new merger wave: reluctance on the part of would-be sellers, some analysts say.

Many attractive targets figure they should be able to fetch far higher prices in a year or two if the economic rebound continues, and are hesitant to sell when their stocks still are far below their all-time highs.

"You’re seeing many deals not happen because of that," said Ravi Chanmugam, head of the North American M&A practice at Accenture, the consulting firm.

Target companies’ desire to hold out could spur a "sharp resurgence" in hostile offers, in which buyers try to do an end-run around management and take their case directly to shareholders, analysts at Citigroup concluded in a recent report.

In any case, deals are likely to beget more deals as acquiring companies watch rivals pull off transactions.

"Many firms have just not seen a lot of their peers pull the trigger on deals, so if you pull the trigger you’re somewhat unique in today’s market," said Scott Kolbrenner, an investment banker at Houlihan Lokey in Century City.

-- Walter Hamilton

Image credit: Zazzle.com

Disney's premium for Marvel: Not enough, or too much?

Some Marvel Entertainment Inc. shareholders may wonder if they’re getting a high enough premium for the company in Walt Disney Co.’s $4-billion takeover offer today.

Wall Street may be wondering just the opposite: whether Disney is overpaying.

The cash-and-stock deal -- each Marvel share will fetch $30 cash plus 0.745 of a Disney share -- valued Marvel at exactly $50 a share based on Disney’s closing stock price on Friday.

That was a 29.4% premium to Marvel’s closing price of $38.65 on Friday.

As premiums go, that’s less than the 36.8% average offered this year in other U.S. merger deals worth $1 billion or more, according to data firm Dealogic Inc.

Still, Marvel shares already were up 26% year to date through Friday, nearly double the advance of the Standard & Poor’s 500 index.

And based on the price it’s paying, Disney estimated that Marvel won’t begin to add to the Burbank giant’s earnings until fiscal 2012.

Disney executives’ tone on a conference call with analysts today suggested that they know they’re going to take some heat for paying up relative to where Marvel shares were trading.

Disney Chief Financial Officer Thomas Staggs said Marvel was in a "strong financial position. This is not a deal that they had to do. ... So we are acquiring a premium company, a premium set of assets, and for that I think you have to pay a full and fair price."

Disney shares were down 73 cents, or 2.7%, to $26.11 at about 12:30 p.m. PST, trimming their year-to-date gain to 15%.

Marvel shares were up $9.74, or 25%, to $48.39, just slightly below the $49.45-a-share value of the deal given the slide in Disney’s stock today.

If Wall Street believed that some Marvel shareholders might pressure Disney for a higher bid, the stock would be trading above the deal’s value today.

Also note that Marvel CEO Ike Perlmutter owns about 37% of the stock, which helps to lock up the deal as agreed.

-- Tom Petruno

Image: Iron Man. Credit: Marvel Entertainment

FDIC eases rules for private-equity firms to buy failed banks -- sort of

Faced with a rising caseload of failing banks, the Federal Deposit Insurance Corp. decided today that it can’t be overly picky about who buys the carcasses.

The insurance fund’s board voted to back down from a proposal to require that private-equity firms maintain an unusually high capital-to-assets ratio for failed banks they buy.

The FDIC board voted to lower to 10%, from a proposed 15%, a basic measure of the minimum capital buffer that private-equity investors must maintain for three years after buying a bank. A lender’s capital is its bulwark against loan losses.

"We want to maximize investor interest in failed institutions," FDIC Chairwoman Sheila Bair said at the meeting, explaining the decision to lower the capital threshold.

But the 10% capital requirement still is twice the level that an existing bank must maintain to be considered "well-capitalized" by the FDIC. And as Rolfe Winkler at Reuters notes, the FDIC actually set a higher standard than it appears, because the 10% refers to so-called Tier 1 common equity, a stronger buffer than the broader Tier 1 capital gauge.

The original 15% capital proposal had triggered outrage from some private-equity leaders, including Wilbur Ross of WL Ross & Co., which was part of a partnership that bought the failed BankUnited Financial Corp. of Florida in May.

"I assure you that my firm will never again bid if the proposed policy statement is adopted in its present form," Ross told the FDIC in a letter last month.

Today, Ross told Bloomberg TV that the revised proposal "is better than the one they had before but it isn’t a champagne-cork popper."

The Private Equity Council, representing some of the industry’s biggest firms, said in a statement that the FDIC’s revisions were an "improvement" from the original plan. But the group still called the new rules "onerous," and said it was "counterproductive to impose measures that could deter investors who are ready, willing and able" to provide capital to banks.

"Given the well-documented track record of private equity firms in turning around troubled companies, it also makes little sense to deprive the banking system of needed expertise," the council said.

Another potential sticking point: The FDIC stood firm on its plan to forbid private-equity buyers from quickly flipping any banks they buy. They’ll have to hold on to the institutions for at least three years.

The FDIC’s fear is that private-equity buyers could swoop in, pick up failed banks on the cheap (with the FDIC absorbing most of the loan losses), then spin them off at a profit to other investors in a relatively short period -- perhaps before the banks are ready to stand on their own. That raises the risk of a second round of failures.

You can’t blame the FDIC for worrying that private-equity investors could be hunting for a fast buck. They’re supposed to be opportunistic investors, after all.

Besides BankUnited, private-equity buyers also scooped up failed IndyMac Bank of Pasadena earlier this year.

Most failed banks are merged into other banks, but private-equity buyers broaden the pool of potential bidders, which in theory could mean a savings to the FDIC in disposing of troubled banks.

Eighty-one banks have failed this year, and the FDIC’s deposit insurance fund is running low -- though it can’t run dry because the agency has a $500-billion credit line with the Treasury. The FDIC also can continue to raise insurance premiums for healthy banks to replenish the fund.

-- Tom Petruno

Photo: FDIC Chairwoman Sheila Bair. Credit: Andrew Harrer / Bloomberg News

BofA defends settlement over Merrill Lynch bonuses

Bank of America Corp. came out swinging today in defense of its hoped-for legal settlement with securities regulators over controversial bonuses at Merrill Lynch & Co.

The bank stressed in court papers that it never misled shareholders about the bonuses and that it repeatedly made clear that billions of dollars would be doled out to Merrill employees before its acquisition of the investment banking giant was completed Jan. 2.

The filing urged a federal judge to approve a proposed settlement between it and the Securities and Exchange Commission.

The SEC has alleged that the bank misled shareholders into believing that Merrill would not pay year-end 2008 bonuses as it limped through a financially devastating year. In fact, the SEC alleged, the bank had already approved $5.8 billion in bonuses at Merrill, of which $3.6 billion was eventually doled out.

“Throughout 2008 – both before and after the merger agreement was signed – Merrill Lynch consistently disclosed its intention to pay incentive compensation in the range of multibillions of dollars,” the bank’s attorney, Lewis Liman, wrote.

BofA and the SEC are trying to convince U.S. District Judge Jed Rakoff to approve the $33-million settlement.

At a hearing two weeks ago,  Rakoff blasted several key elements of the settlement and said he wouldn't approve it until he gets additional information on several key points.

Among other things, Rakoff said he wants details on whether BofA intentionally misled shareholders about the bonuses, the names of which executives and lawyers approved the bonuses, and whether shareholders got sufficient information about Merrill’s weakening finances before they voted to approve the merger late last year.

Rakoff also said at the hearing that he was troubled by the proposed settlement amount, saying $33 million could be far too little if BofA was shown to have deceived shareholders.

-- Walter Hamilton

Earlier: BofA, SEC to file details on Merrill Lynch bonuses