Is Cerberus Going To Call It Quits?

There's speculation over on Clusterstock that PE giant Cerberus might just throw in the towel and give Chrysler away.

Clusterstock: Could Cerberus Just Hand Chrysler's Keys To The UAW?

Given that Chrysler equity is worth exactly zero -- seriously, that's what Daimler values its 19.9% stake at -- Cerberus isn't being generous in its offer to contribute equity, nor is it clear what concessions the various stakeholders would want to make in exchange for that equity. The bottom line here is that despite the $4 billion its getting from the government, it still is headed straight towards bankruptcy. Unlike GM, which believes it can restructure and turn things around, Chrysler didn't even opt for typical corporate puffery.

I'm sure that buying Chrysler seemed like a good idea at the time. One commenter on Clusterstock asks what their original plan was. Really, what modelling did they do that led them to believe that they could get into the US Auto industry and make out like bandits?

It probably looked something like this:

1) Acquire Chrysler

2) ????

3) PROFIT!

Ooops!

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Cerberus Cries Boo Hoo

Yahoo: Cerberus claims it was misled in deal for Chrysler

Cerberus accuses Daimler of misrepresentations before deal to buy Chrysler closed last year
DETROIT (AP) -- Relations between Chrysler's current and former owners turned ugly Wednesday when private equity firm Cerberus Capital Management LP accused Daimler AG of "intentionally and materially" misleading Cerberus before the German automaker sold Chrysler last year.

Pretty goddamn funny for a bunch of guys who think they're the smartest ones in the room to now claim that they were hoodwinked.

More likely: they learned that not only aren't they as smart as they thought, but also that Six Sigma can't fix everything.

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BCE Totally Screwed

Bad news for shareholders looking forward to the buyout that was supposed to take telco BCE private.

Yahoo!: BCE says buyout in jeopardy, shares sag

Reuters) - BCE Inc said on Wednesday it was unlikely its C$34.8 billion ($28.2 billion) leveraged buyout would close next month after its accountants ruled that the company that emerges from the deal would not meet a solvency test because of its huge debt load.
Shares of BCE, Canada's biggest telecom company, plunged almost 40 percent as investors reacted to the latest twist in the saga of the world's largest leveraged buyout, which is being led by the Ontario Teachers' Pension Plan.
The deal has already faced regulatory scrutiny as well as a Supreme Court of Canada challenge by angry debt investors as it inched its way forward to the scheduled December 11 closing date.
And on Wednesday, BCE -- the parent of Bell Canada -- said its accountants, KPMG, have found the company would not meet the buyout agreement's solvency test because of current market conditions and the amount of debt involved in the financing.

Bad news for shareholders, good news for the underwriting banks that weren't happy with the terms they had written.

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GM Negotiating For Chrysler. Wait, What!?

So the WSJ and NYT reports, and pointed out by Calculated Risk.

Calculated Risk: GM to Acquire Chrysler?

The WSJ reports that GM has recently talked with Cerberus about acquiring Chrysler's automotive operations in exchange for GM's remaining 49% stake in GMAC.
Cerberus would keep Chrysler's financing arm - and probably would combine it with GMAC.

As I'm fond of saying about airline mergers: great, after they merge they can plunge into bankruptcy together. Now there's a synergy for you!

I suppose we ought not to be surprised that it didn't take Cerberus long to decide that the carmaking business wasn't what they hoped for, and to seek an exit back to straight finance, which I expect they have a clearer understanding of.

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HBC Changes Hands From One Private Equity Company To Another

Who said that the global credit crunch has dried up all the opportunities for dubious, ill-thought out Private Equity plays? The purchase of beleaguered Canadian retailer HBC by NRDC Equity Partners doesn't count as being taken private, since HBC was bought by the late Jerry Zucker's PE enterprise in 2006. TV personality Stephen Colbert might call it being taken private-er.

Yahoo! News: Hudson's Bay Co. bought by U.S. private equity owner of Lord & Taylor

TORONTO - The Hudson's Bay Co. has been bought by the private equity firm which owns American department store chain Lord & Taylor.
The purchase by New York-based NRDC Equity Partners, for an undisclosed amount of money, combines two of the oldest department store retailers in North America. It puts together HBC's Bay, Zellers, Home Outfitters and Fields operations with NRDC's Lord & Taylor group and Fortunoff jewellery and home-decor chain.

Since it's a PE to PE deal, it's going to take some digging to find out what NRDC paid for HBC. A cynic might suspect that it was at a liquidation rather than a premium price given how, you know, nobody actually shops at the HBC family of stores. On the other hand, HBC still has a pretty cherry collection of real estate, as well as lease locations, so the potential is there for a reasonable profit, given that Zucker originally took HBC private at a fire sale price.

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The Sharper Image's New Owners Make Hay While The Sun Sets

TWICE: New Sharper Image Owners Shut Stores

The investment consortium that acquired The Sharper Image last week for $49 million in a bankruptcy auction said it will close the chain’s remaining 86 stores and will leverage the brand under a new licensing strategy.
The partners, which include liquidator Gordon Brothers, private equity firms Hilco Consumer Capital and Windsong Brands, and investment group Bluestar Alliance, said they have developed a global licensing strategy for wholesale, direct-to-retail, e-commerce and catalog businesses that will “exploit The Sharper Image’s heritage of quality, excitement, innovation and fun.”

It would ill-behoove the proud new owners of The Sharper Image to delay too long in seeking to capitalize on the value of their acquisition's brand.

To be blunt, beyond whatever value their inclusion in the SkyMall catalogue carries, The Sharper Image's brand value can be likened to the sand running out of an hourglass. I am keen to see what they do to revive a brand that I only associate with ludicrous kitsch that runs on AA batteries, and outdated 80's chic.

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What's Going On Over At Circuit City?

After weeks of punishment, the stock of beleagured CE retailer Circuit City is up nearly 15%, on a day when market indexes are all down overall.

Today, Wattles Acquisition Corp. announced that they have a 6.5% stake in the company.

Is this the glimmerings of a PE buyout, something that for some time I've been suggesting might be a good idea?

More on this story as it develops.


*UPDATE*: Rumors are flying that CEO Philip Schoonover is toast, but there's no official confirmation of that. Also, Circuit City's has climbed by 20% as of the time of this update.

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Some people cheer Nardelli's role at Chrysler

That's right, you heard me. Not everybody thinks that the man who ran Home Depot onto the rocks is a poor choice to steer Chrysler between the Scylla of the UAW's bloodsucking demands and the Charybdis of horrific infrastructure costs.

Today's feature in Bloomberg is full of quotes from people who think that he will do a bang-up job:

Bloomberg: Nardelli, Cost-Cutter, Is `Perfect Fit' at Chrysler, Welch Says

Aug. 7 (Bloomberg) -- Robert Nardelli, who stumbled in the public eye at Home Depot Inc., may do better at Chrysler LLC as the now-private U.S. automaker focuses on trimming expenses and generating cash, not stock returns.
``This is an absolutely perfect fit,'' said Jack Welch, retired chief executive officer of General Electric Co., where Nardelli worked from 1971 to 2000. ``They've got to get cost, efficiency, service, all those things in line,'' Welch said. ``He's the best in the world at that.''

...

``Nardelli is an agent of prompt change,'' said Dan Poole, who helps manage $31 billion at National City Bank in Cleveland including shares in Home Depot and DaimlerChrysler. ``Frankly, a private company might be a better place for him because they want revenue and earnings, and that's what he delivers.''

...

Keith Davis, a Washington-based analyst with Farr Miller & Washington LLC who helps manage about $600 million, said Nardelli may fare better at Chrysler because the automaker is a manufacturing company like Fairfield, Connecticut-based GE.
`Taking Costs Out'
``He's shown he's great at taking costs out of the business,'' Davis said.

Okay, he's great at cutting costs. Woo Hah. But can he drive more consumers into driving Chryslers? Cutting spending is good, but no one ever made more money by spending less. You make more money by making more money.

Now that Chrysler is private, I don't expect Cerberus to be especially forthcoming about in the media about the progress of the turnaround. Without public shareholders, they don't have to. The UAW, on the other hand, would not appear to have the same self-interest in keeping their lips zipped, especially if they feel they aren't getting their way. I suspect that outside observers will end up with a more candid view of a private turnaround with Chrysler than with previous ventures.

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Lots of bile over Nardelli taking the reins at Chrysler

As you might expect, the appointment of ex-Home Depot front man Bob Nardellli as Chrysler's new CEO has generated reams of invective amongst all the Usual Suspects in the blogosphere.

It's not just his appointment to the top spot that's forcing members of the Commentariat to keep a spitoon next to their computer monitors, so that they can hawk the bad taste out of their mouths while they type, it's the way that the mainstream business media are going out of their way to laud Cerberus' decision, and write about Nardelli as if he was the second coming of Lee Iaccocca.

Some choice bits of bile:

Gary Weiss: The Media's Nardelli Puffery
Imperious, disgraced, grasping, serially incompetent CEOs apparently are in short supply. Bob Nardelli, who embodied those virtues as CEO of Home Depot, has now re-emerged at the helm of Chrysler. What is even more amazing as the media's ho-hum reaction to this absurdity.

The Street's Marek Fuchs foams at the mouth and chews his keyboard to splinters for three pages in his tirade entitled Reminder: Nardelli Blew It at Home Depot
But you ask, surely of all CEOs, the discredited Nardelli, who did about as bad a job as any modern CEO, would at least garner coverage that accurately put his disastrous tenure at Home Depot in complete perspective, right?
You didn't really ask that, did you?
In the bountiful bubble years that were the American real estate market between 2000 and 2006, every two-bit hustler peddling a mortgage or home improvement product made major dollars. Home Depot shareholders? Not one thin dime.

I have a different perspective.

Cerberus Capital knows that the turnaround at Chrysler is going to be costly and bloody. I think that Cerberus tapped him because a) he does have a marquee pedigree that the business media will eat up, as we have witnessed, b) he was the only CEO in their Rolodex who could start immediately, what with being unemployed and all, and c) he’s the expendable crewmember, and they have every intention of jettisoning him if things don’t work out. Of course, if things go poorly, it will be all his fault.

Seeing such cynicism on this blog probably comes as a shock to you faithful readers who usually expect my analyses to be composed of rainbows, candy canes, and puppy dogs, but there you have it.

Earlier: Nardelli tapped to renovate Chrysler's fortunes

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Nardelli tapped to renovate Chrysler's fortunes

Cerberus Capital has chosen former Home Depot front man Bob Nardelli to head Chrysler.

The Guardian reported in Dealbreaker's Opening Bell
The appointment of the controversial Nardelli caught industry observers on the hop this morning, as Cerberus chairman John Snow said only last week Chrysler's management would stay intact.
It is the second time an outsider has been appointed to lead a major US car-maker in the past year after Ford hired Alan Mulally as chief executive from Boeing.
Mr Nardelli is a former General Electric executive who lost out to Jeffrey Immelt in the contest to succeed Jack Welch as chief executive. He is credited with overhauling Home Depot's purchasing and technology systems, but left at a time when the share price was stagnating alongside worsening customer service, and was seen as arrogant towards shareholders.

After Nardelli's dissapointing results with Home Depot, the jokes that can be made at his expense are all too obvious, so I'm going to play this one straight.

Given Cerberus' choice of Chief Executive for their new carmaker, this reinforces my previously stated opinion that Chrysler's rebirth will be particularly Phoenix-like: there's going to be a lot of fire and ashes. I'm not saying that the conflict between Chrysler managment and the United Auto Workers will compare with the bloody union-busting conflicts of the late 19th and early 20th centuries, but it's tempting mental picture, isn't it?

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Telus gives up on buying BCE

Yahoo!: Telus to abandon BCE pursuit: report

NEW YORK (Reuters) - Telus Corp. is expected to abandon efforts to buy rival BCE Inc. in part because it could not get guidance from regulators about which assets it would have had to sell for a deal to be approved, the Globe and Mail reported on its Web site on Friday.
Telus pulled out of the auction for BCE in June but had been expected to come up with a better offer, the paper reported.
BCE, which is Canada's largest telecommunications group, has accepted an offer worth C$34.8 billion from a group including the Ontario Teachers Pension Plan.
Since pulling out of bidding, Telus had been lobbying regulators and meeting the Canadian Competition Bureau, hoping to get some guidance before BCE held its shareholder vote, the paper reported, citing unnamed sources.
It was told recently that the guidance would not be forthcoming, the paper said.
The shareholder vote could happen as early as mid-September, the paper reported.
Telus could not be reached immediately for comment.

You would think that in order for regulators to approve a Telus purchase of BCE, Telus would have to divest itself of it's telephone and DSL broadband businesses first.

Seriously though, it's unfortunate that Telus has been unable to take a crack at getting themselves set up with an established broadcast provider. Left to their own devices, all they've come up with is Telus TV, and look how well that has taken off!

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The Epicurean Dealmaker's exclusive scoop on Blackstone

The Epicurean Dealmaker: Penny Wise
Well, thanks to my talent for suborning disgruntled junior PE professionals, I can now report on the reactions of at least one altitudinally challenged squillionaire. It appears that Mr. Schwarzman has been taking time almost every day—even while on a less-than-satisfying French vacation—to record his reactions to the daily ups and downs of BX stock. No wonder, since for every penny BX shares move his personal net worth goes up or down by $2.5 million.

***Caution: DO NOT peruse TED's accompanying spreadsheet graphic while you are drinking a beverage, such as coffee. Failure to heed this warning may result in the need to purchase some of this.

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Mysterious Private Equity takeover rumors swirl around Samsung

This is one of those stories that I don't buy, but it's going to grow legs because it's the kind of thing that people like to believe.

Chosun Ilbo: Samsung Electronics Wary of Rumored Takeover Bid
A Samsung Electronics executive said Thursday there were rumors that foreign hedge funds are going to buy a large amount of Samsung Electronics stocks and the company is drawing up protective measures against a takeover bid. Apparently, Samsung got a tipoff that the corporate raider Carl Icahn plans to field a hostile takeover bid for the company.

TWICE: Samsung Profit Down, Stock Up On Takeover Report

Samsung Electronics reported today its second quarter net profit fell 5 percent from the same period last year, but its stock rocketed upward on reports in the Korean newspaper Chosun Ilbo of a takeover attempt by Carl Icahn.

I'm seeing a whole lot of speculation, and not a whole lot of corroboration here. I suppose we shall see what we shall see.

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Takeover rumours swirl around Forzani, Forzani denies everything

Globe and Mail: Forzani wants to be hunter, not hunted
Forzani Group Ltd. is more interested in making acquisitions than parrying bids from potential buyers, chief executive officer Robert Sartor says.
The company has had inquiries but isn't interested in selling, he said in an interview yesterday after the annual shareholders' meeting. “It's a big ocean out there and we're a fish in it. Some are eyeing us and we are eyeing others.”
Shares in Forzani, Canada's largest sporting goods retailer, soared to near-record levels over the past week on rumours it could be a target for private equity interests. The firm confirmed last week it has been approached about a possible takeover or business partnership, but did not identify who made the inquiries, and said it has received no formal offers.
“An inquiry is not an expression of interest; it's to find out if you have nothing better to do,” Mr. Sartor said in the interview. “We still have a lot on our plate, and we have a business to run.”

Given that it is not at all unusual for executives to flat out lie about the state of merger inquires (I'm looking at you, Bell Canada!) I am going to put my money on it having been Opposite Day when Bob Sartor was asked to comment.

Founder John Forzani has stepped back from controlling his baby, their banners are doing great, and to a foreign retailer or Private Equity company, they represent a strong brand, great results, and more importantly, a key strategic toehold into the Canadian retail marketplace. Why wouldn't they be a prime aquisition target? I think a deal will be announced before the end of June.

There, I said it.

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One more Chrysler comment

...and then I'm calling it a day.

I'm thinking that we're all going to have ringside seats for a matchup that's been hyped up since the days of Plato and Confucious.

The Irresistable Force: Cerberus, a Private Equity company that cares only about the final number at the bottom of the balance sheet once the smoke settles, and not the collateral damage that goes along with it.

The Immovable Object: The United Auto Workers union, who take scorched earth to a new level when it comes to negotiating. The Russians rolled over to both Napolean and Hitler in comparison to the conflict we're going to see once Cerberus starts sharpening it's carving knife and looking hungrily and the union's benefits package.

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Monday-morning quarterbacking of the Chrysler buyout by other people

Yesterday Dealbreaker's Bess Levin conclusively proved that satire is dead, by pointing out that Daimler essentially paid Cerberus Capital to take Chrysler off of their hands:

Dealbreaker: Daimler's $650 Million Bar Tab

But it’s Deal Journal that actually tells us something interesting: by “sale of $7.4 billion,” Daimler actually means “it’s going to cost us $650 million” to get rid its red-headed step-child.
As the release itself explains:
Cerberus is contributing $5 billion into the new company (this does not go to Daimler). And another $1.05 billion goes into the financial business (this, again, does not go to Daimler.) Daimler gets $1.35 billion (but will loan the new company $400 million.)
So Daimler makes about $1 billion then, right? Actually, no.
Like a politician obliquely saying “mistakes were made,” Daimler goes on to say that the restructuring “will give rise to a cash outflow” of $1.6 billion.
In sum, the net outflow will be about $650 million, plus another $878 million of “prepayment compensation”, Daimler says. And that’s how a $7.4 billion windfall actually turns into a bill.

As expected, Long or Short Capital has published their analysis of the Chrysler deal, and have drawn some sobering conclusions.

Long or Short Capital.com: Better Ways to Spend $7.4 billion than buying Chrysler

• Donating $1,000 in malt liquor money to each member of the US homeless population
  


• Making Spiderman 3 24.67 times
  


• Drowning a stripper by making it rain with $7.4 billion in singles. Sacagawea singles.
  


• Buying decaying shark corpse art for all your closest friends. Your 1,000 closest friends assuming you get a discount for buying decaying shark corpses in bulk (we have little information on the dynamics of the decaying shark art market).
  


• Purchasing Manchester United, Arsenal, AC Milan, Real Madrid, the New York Yankees, the Boston Red Sox, the LA Dodgers, the Chicago Cubs and the New York Mets with enough cash to probably buy half the NHL.
  


• Lifetime bottle service
  


• 1.75 billion golf balls to prep for that management consulting interview question
  


• A money bonfire

Since they were willing to go all-in on Chrysler, I'm sure that if you could outline a plausible-sounding exit into an IPO for the money bonfire, Cerberus Capital would be all ears.

Now it's my turn:

Predictably, the Canadian media's angle all fell along similar lines: "Cerberus outbids Magna for Chrysler", despite the Canadian auto-parts company being a day late, and $2 billion short, the collective dissapointment amongst navel-gazing Canuck journalists was palpable. It's a tragedy, I know, that a Canadian company ends up being a spear-carrier on the world stage instead of a major player again. Perhaps the combination of smug self-centeredness, combined with a much smaller pool of capital explains in part why Canada has so few companies that are global brands.

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Chrysler sold for $7.4 Billion

Bloomberg: Daimler to Sell Chrysler to Cerberus for $7.4 Billion reported on Dealbreaker's Opening Bell
May 14 (Bloomberg) -- DaimlerChrysler AG agreed to sell the Chrysler unit to Cerberus Capital Management LP for 5.5 billion euros ($7.4 billion), abandoning a nine-year effort to make the U.S. division profitable.
Cerberus will buy 80.1 percent of Chrysler, with Daimler holding the remaining 19.9 percent and a new company will be formed to be called Chrysler Holding LLC, the Stuttgart, Germany-based automaker said today in a statement. The transaction will be completed in the third quarter.
Cerberus purchases a company that lost 500 million euros last year and shed market share to Toyota Motor Corp. while relying too much on the stagnant North American market.

Given that Cerberus' model, like all other PE firms is to buy a company that has potential, but is drowning in failure, clean it up and turn it around, and then resell it back onto the capital markets, it's safe to assume that Cerberus has a plan.

On the other hand, the first casualty of every battle is the plan. I wonder just how much the UAW will tolerate when it comes to trimming overhead associated with labor costs?

For a better analysis than I can give, read law professor Larry Ribstein's commentary on his blog here.

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Speaking of Private Equity, What's Up with HBC?

The short answer is "nobody knows."

I was having lunch with the area rep for a major manufacturer last week. Amongst all the other industry gossip we covered, the subject of HBC and The Bay came up, since he has to call on their Alberta stores where his brand is displayed. His comments all boiled down to disapointment with their sales volume, and the lack of either motivation or ability amongst their commission sales associates. I knew he was especially cross when he ranked The Bay's commission sales associates beneath the hourly wage kids at Best Buy/Future Shop. Is that comparison embarrasing enough for you?

In the one year plus since Maple Leaf Holdings took HBC private, the changes they have made seem to have amounted to a lot of a little. On the one hand, their tv spots and Run of Print ads for both The Bay and Zellers have become catchier and more coherent in their message. On the other hand, the stores themselves are an embarassment, which I have talked about before.

So, the initial impression is that they are spending more money at Head Office, but not improving the actual customer experience through supply chain management, and Visual Display. All the attempts at Visual Display I've witnessed on the now rare occassions that I havebeen persuaded to try and shop at a Bay or Zellers have come across as half hearted and vaguely pitiful.

If the big strategy to turn HBC around is to spend more on advertising, and less on store operations, I don't think they're on to a winner.

Personally, I think that HBC's owners are killing time as they quietly shop around HBC's real estate assets, which is where the real value lies in the company. Given the mediocrity of the store experience under the new ownership, I don't give much credence to the talk of turning their retail performance around. I, and others like me, know what has to be done to right-size HBC and make it viable, but the last time I checked, no one was asking us, nor offering to pay us to do it.





As an added bonus, this link to the open forum on the Discover Vancouver website is full of internet trolls, both ex-HBC staff and ex-shoppers bitching and moaning about how much they hate HBC. I stumbled across it one day while Googling myself (I know, I know). I'm not suggesting that you should give too much credence to anything printed anonymously on the internet, but as my friend Jason at the Marketing Matters agency tells his clients, as part of understanding your brand, Google "your company" + "sucks" to get a complete picture of where you are in the marketplace, and what you can do to improve.

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Dow Chemical At Center of $50 Billion Private Equity Bid

Reuters:
Dow Chemical to face $50 billion bid: report
LONDON (Reuters) - A consortium of Middle Eastern investors and American buyout firms is preparing a $50 billion approach for Dow Chemical Co. (DOW.N: Quote, Profile , Research) in what could be the world's biggest ever leveraged buyout, a paper said on Sunday.
Quoting sources close to the deal, The Sunday Express, a UK tabloid paper, said a financing package has been put in place for a break-up bid of between $52 to $58 a share and an approach valuing the company at least $50 billion could come by the end of this week.
Dow's shares closed up 35 cents at $44.47 on the New York Stock Exchange on Thursday.
At least half of the capital is being provided by investors from Saudi Arabia, Kuwait, Bahrain, Qatar, UAE and Oman, with the rest contributed by a number of U.S. buyout firms including Kohlberg Kravis Roberts (KKR.UL: Quote, Profile , Research), it said.
Representatives of Dow Chemical and Kohlberg Kravis Roberts were not immediately available for comment.
The story follows reports in recent months that strategic changes were afoot at Dow, which has been moving toward a focus on specialty chemicals.
In March the Wall Street Journal said Dow was in talks with India's Reliance Industries Ltd. (RELI.BO: Quote, Profile , Research) about a potential joint venture, citing people familiar with the matter.
Analysts had said they were unsurprised at the report and expected Dow to split off its basic chemicals and plastics business as part of what it has called its "asset light" strategy, which would give it a more nimble and higher-margin profile focusing on specialty chemicals.
In late February the Sunday Express reported that Dow could get a takeover offer of as much as $54 billion from buyout funds, without naming any sources.
The paper had said the approach was likely to come from a combination of global investors and American private equity giants, who intended to break up the group into smaller companies through a highly leveraged buyout.
(Additional reporting by Sinead Carew in New York)
© Reuters 2007. All Rights Reserved.

At the same time that pundits at the WSJ, NYT, and other usual suspects have been positing the end of Private Equity, the crown for Biggest Buyout Ever changes hands on a nearly weeky basis. Really, once the Dow Chemical deal passes from rumor to fact, the only question will be, who is going to be the Biggest Buyout Ever next week?

Despite talk by governments about changing how PE ventures are taxed, I suspect that as long as there are ponderous corporate entities with hidden value locked into their monolithic structure, legislation like Sarbannes-Oxley that makes it onerous and unattractive to be a publicly-held company, low interest rates and readily available financing, and boatloads of private money looking for a place to put it, Private Equity will remain open for business for a while yet.

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What's In Store for Private Equity in Canada?

Since there has been much talk in both the new and old business media about moves afoot in the US and Europe to legislate changes to the tax structure of Private Equity ventures, and since Lee Distad's Professional Opinion is dedicated in part to presenting a Canadian perspective on business and industry, and since nothing either amazing or stupid has happened in Consumer Electronics in the last two days, I thought I would bring this up.

For your enjoyment, Canadian Business columnist Jack Mintz's column this week deals with how the Federal Government is taking a look at Private Equity.

Here is the nub. In the United States, pension plans are less able than they are here to participate in private equity capital, since they are subject to the unrelated business income tax, which applies to business investments held by the plan. Thus, for example, a Canadian pension plan can buy out an oilsands development and restructure it with debt to eliminate corporate tax payments; in the United States, a special tax would be paid on income. If debt restructuring leads to a significant competitiveness issue, whereby pension-funded investments have a lower cost of capital to acquire Canadian businesses, as has already happened in real estate markets, watch out — the taxman might be at the door.

Read the whole thing here.

I consider myself somewhat laissez-faire small-"l" libertarian (definetely not a foaming at the mouth, gun-toting, tinfoil hat-wearing large-"L" Libertarian). That said, I am strongly opposed to government fooling around with the tax code evertime some clever finance monkeys find a way to generate huge returns on their investment and at the same time pay less tax on it. The whole debacle last fall on the Income Trust issue (not that many of the late-to-the-party trust conversions didn't deserve to have much of their value stripped from them in the free-fall that followed) is a good reminder of what happens when the government decides to change horses in mid-stream on economic policy. Rewriting tax code is seldom motivated so much by the desire to enact social good as it is a greedy attempt to shore up government spending by changing the rules on how hard they are allowed to squeeze.

What do you think?

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