Connecting the Dots

I'll begin with a nod to Chuck at Ivy Chat who has been all over the Cubs business developments like a wet blanket. A few days ago, Chuck commented on an article in Crains about an article in the Wall Street Journal (Tribune Auction Draws Private-Equity Interest).

Now, this morning's Wall Street Journal contains another interesting article. While it doesn't specifically mention the Cubs or the Tribune, the well attuned Cubs fan should be raising their antennae. The article announces that Blackstone Capital Partners V, LP is re-opening their fund and expanding it by $4.4 Billion. (Growing Funds Fuel Buyout Boom)

What is even more interesting is the rationale for doing so.

[Blackstone Private Equity] decided to reopen its new $15.6 billion fund to investors because it was approaching a limit on how much it can spend each year. The firm promises its clients that it won't invest more than 40% of its money a year to avoid betting too much at once.

Editor's Note: For the benefit of those who don't work in finance, a private equity firm is similar to a mutual fund, only it is restricted to much wealthier individuals. The firms raise funds every few years and then invest that money in companies, hoping to make a profit as quickly as possible. Typically, these funds have a restriction on how much of the total fund may be invested in one year.

Now how does this pertain to the Cubs? The first article indicates that Private Equity Firms are swarming around the Tribune company like Piranhas in heat. It indicates that there are (so far) two groups of firms who were teaming up to submit bids. Further, the article mentions that the Carlyle Group, a huge fund, was also interested, but had not decided whether to join one of the existing teams, or create it's own.

Conspicously absent from the article was any mention of the Blackstone Group or KKR (Kohlberg Kravis and Roberts). These two Private Equity funds are amongst the largest in the country and would be expected to be active in such a large deal. (The Tribune could sell for $8-$10 Billion.)

Further, the first article also mentioned that the Tribune Company would like to close their deal by year end. Thus, one can infer from the normal pattern of how deals like this work that final bids are likely due in the next week to ten days. At that point, the Tribune Board would meet and select a bidder. The time from when the Board selects a bidder until the deal closes typically ends up being around six to eight weeks.

Thus, from the first article we know that a Private Equity firm is likely to buy the Tribune and that these firms are scrambling to get bids together. We have also noted the absence of Blackstone and KKR from the rumors.

Turning now to today's article, we get news that Blackstone is re-opening their fund so that they can have more money to invest. While reopening a fund is not unheard of, reopening the largest fund in the country to make it even bigger is certainly rare. And while I have no doubts that the egos at Blackstone don't wish to become second fiddle too soon, I doubt they would go through the expense of reopening the fund if they didn't have an investment in mind.

And that, my friends, is where we connect the dots. Perhaps, just perhaps, Blackstone is thinking of purchasing the Tribune Company. Perhaps, just perhaps, the Carlyle Group wanted a partner and Blackstone wanted to join them... and perhaps, just perhaps, Blackstone needed some extra room in their budget to come up with the money they will need to buy the $8 billion dollar Tribune Company.

Doing some quick math, expanding a fund with a 40% annual cap by 4.4 Billion gives Blackstone an extra $1.76 Billion to use this year in their quest for the Tribune.

Am I reading too much into the situation? Perhaps... but then again the price of Tribune stock is up nearly 1.5% this morning.

Pestilence is an accountant at a Private Equity firm. While he has no inside information on this deal, he is fairly familiar with the workings of a PE firm and how deals are structured.