Crains New York - October 29, 2012 - (Page 4)

PE guys cash out while they can Looming tax hikes, slow IPO scene spur debt run-up to fund big dividend payouts BY AARON ELSTEIN Back in 2010, private-equity firm Carlyle Group ac2012 Election quired Long Island-based NBTY Inc., which sells vitamins under the Nature’s Bounty label,in a $3.6 billion leveraged buyout. Carlyle anted up $1.55 billion in cash to finance the deal and borrowed the rest. In October, with the stroke of a pen, Carlyle recouped about half the money it invested in the LBO. It did so by having NBTY take on another $550 million in debt and dip into its cash reserves so the company could funnel a $672 million dividend to Carlyle. Carlyle wouldn’t comment on the cash extraction, but such moves— which the LBO world calls dividend recapitalizations, or leveraged recaps—are all the rage these days. Companies this year have borrowed a record $62 billion through midOctober in order to pay for dividends to their private-equity owners, according to Standard & Poor’s, and rare is the LBO shop that hasn’t piled more debt onto its holdings and mined them for cash. Blackstone Group, for instance, had SeaWorld Parks & Entertainment borAMOUNT row around half BORROWED a billion dollars so far this year for earlier this year dividend payouts to PE owners so it could pocket a dividend— the second such payout it commanded in nine months. Hospital operator HCA borrowed $2.5 billion in October to help finance a $1.2 billion dividend payout, 40% of which went into the pockets of private equity owners Bain Capital and KKR & Co. Carlyle-owned management consulting firm Booz Allen Hamilton paid out a nearly $1 billion dividend in July after borrowing more than twice that amount. “Any time is a good time to take out millions’ worth of dividends,” said Steve Miller,managing director at S&P Capital IQ’s Leveraged Commentary and Data. But several factors are also driving this year’s surge in leveraged recaps. Dealmakers say they’re hitting up their companies for cash because it’s tough for LBO firms to fetch attractive prices for companies via initial public offerings—the traditional ticket to riches for private-equity players. What’s more, plenty of fixed-income investors are eager to snap up the debt used to pay for dividends, since it often comes with hefty yields of 8% or more. In addition, private-equity leaders fear that taxes on dividends and capital gains will rise next year as the Bush II-era tax cuts expire and Washington looks for new sources of revenue. Currently, dividend and capital gains are taxed at 15%, but See PE GUYS on Page 24 IN THE MARKETS by Aaron Elstein $62B What sort of animal is this bond offering? J.H. COHN AND REZNICK GROUP ARE NOW ONE. J.H. Cohn and Reznick Group have come together to create CohnReznick — setting a new standard for accounting, tax, and business advisory services nationally. Expertise and leadership are critical to achieving success. Just ask Joe Torre, world championship winning manager. With combined strengths, game-changing advice, and deeper industry expertise, CohnReznick delivers big-picture business solutions to help you solve complex challenges and capitalize on future opportunities. That’s forward thinking. That’s CohnReznick. A ttention, animal lovers: The bond market is calling. The Wildlife Conservation Society, which operates New York City’s zoos and aquarium, is looking to issue $112.5 million worth of municipal bonds this week, with the proceeds paying for expansion and renovation projects. Wall Street deals don’t get any cuddlier than this, so let’s take a look at the prospectus. Whether or not you invest, the information at least should give you something to talk about with another adult while your kids are engrossed watching the seals. More than $40 million of the bond proceeds will go to providing a new home for creatures like Shredder, a sand tiger shark residing at the New York Aquarium. The nonSo what do the conservation society’s financials look like? Well, it had $223 million in operating revenue in the fiscal year ended June 30, a $15 million increase over the prior year, and expenses last year were $218 million. You may be interested to know that membership dues and ticket sales account for only about 20% of the society’s revenue, and appropriations from the city have declined over the past four years by $7 million, to $22 million. Fundraising costs account for 3% of the society’s expenses. The conservation society bonds are rated AA- by Standard & Poor’s. That is the fourth-highest grade possible and only a notch lower than the rating assigned to the state of New York. By the way,the deal’s sole underwriter is Goldman Sachs. That seems only fitting, given that the bank is known in certain quarters as the vampire squid. profit conservation society plans to construct a 57,000-square-foot building that will be called Ocean Wonders: Sharks! Upon completion, the aquarium will be able to quintuple its inventory of sharks and other fishy things. What’s more, the new building will be wrapped in a piece of kinetic art—described in the bond prospectus as a “shimmer wall”— that is intended to be “an iconic architectural landmark” on the Coney Island boardwalk. It certainly should provide a striking contrast to the nearby Cyclone roller coaster. There’s more. Bond proceeds will also pay for several renovation projects at the Bronx Zoo, including the reptile and bird houses and the children’s zoo. And the zoo plans to build a children’s farm “for new animal contact and feeding opportunities.” Be sure to bring plenty of quarters so you can buy those pellets that kids feed to the animals. Ken Baggett, CPA Co-CEO Joe Torre World Champion Manager Tom Marino, CPA Co-CEO cohnreznick.com CohnReznick is an independent member of Nexia International $6.78M THE AMOUNT Goldman Sachs seeks to be reimbursed for legal fees and an internal probe of former board member Rajat Gupta, who last week was sentenced to two years in prison for insider trading. 4 | Crain’s New York Business | October 29, 2012 newscom http://www.cohnreznick.com http://www.cohnreznick.com

Table of Contents for the Digital Edition of Crains New York - October 29, 2012

IN THE BOROUGHS
IN THE MARKETS
THE INSIDER
BUSINESS PEOPLE
OPINION
ALAIR TOWNSEND
GREG DAVID
REAL ESTATE DEALS
REPORT: BUSINESS OF LAW
THE LIST
CLASSIFIEDS
SMALL BUSINESS
FOR THE RECORD
NEW YORK, NEW YORK
SOURCE LUNCH
OUT AND ABOUT
SNAPS

Crains New York - October 29, 2012