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DEALS & DEAL MAKERS OCTOBER 14, 2010

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Dividend Rock: Firms Reward Buyout Bosses

EXPERIENCE WSJ PROFESSIONAL

Editors' Deep Dive: Pace of PE Deals

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UK M&A Market Doubles Thanks to Risein Private Equity Players

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By CARRICK MOLLENKAMP, GREGORY ZUCKERMAN and LAURA SAUNDERS

Private-equity firms are on pace to suck a record amount of cash out of the companies they own, responding to a

robust borrowing market and a possible dividend-tax increase in 2011. But some investors are beginning to

question whether the frenzy has gone too far.

So far in October, private-equity owned companies paid out

nearly $1.7 billion in dividends while adding about $4.6 billion

of new debt, according to Standard & Poor's LCD. That is on

pace to top the $2.3 billion monthly record in April 2007. This

month's activity comes on the heels of nearly $2 billion of such

dividends in each of the last two months, S&P LCD said.

More deals are on the way. Thursday, Veritas Capital and a

group of investors are expected to begin marketing a $600

million debt deal for a company they control called Global Tel-

Link that is expected to include a $173 million dividend to

Veritas and other investors, including Goldman Sachs Group

Inc., according to people familiar with the deal.

The deals are being met with skepticism by some investors who

contend borrowing to pay investor dividends can weaken

companies long-term.

In a sign of pushback, nylon producer Ascend Performance

Materials on Wednesday shelved plans for a financing that

would have supported a $922 million payment to private-equity

owner SK Capital. Credit-ratings firms had noted that the

company was struggling until 16 months ago, when SK Capital

began a turnaround of the firm after buying it for $40 million.

SK's co-founder, Barry Siadat, said more than enough investors

were willing to buy $500 million of Ascend's new debt, which

would have given his firm a dividend of that size, but the interest

rate they demanded was more than he thought reasonable.

Separately, Moody's Investors Service on Wednesday issued a

report saying credit quality of U.S. companies "could be nearing

a peak." In an interview, Moody's managing director Mark Gray cited

the rise in dividend deals as among the reasons for concern.

Getty Images

Dividends have been music to private-equity firms.The company that produces 'Dick Clark's New Year'sRockin' Eve,' above with Black Eyed Peas, paid $105million to shareholders including the investment groupof Daniel Snyder, below.

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While investors' appetite has raised demand for the deals, some have

shied from them. "We are philosophically opposed to dividend deals

because issuers are borrowing money to generate a return to

shareholders without enhancing cash flow to service their debt," said

Mark Shenkman, a veteran junk-bond investor and president of

Shenkman Capital Management in New York.

For their part, private-equity pros say cash-flow levels are on the rise for

their companies, making it less risky for them to make big dividend

payments.

One driver behind the current deals, said Standard & Poor's, tax experts

and some private-equity executives, is the threat of higher dividend

taxes next year. The Bush administration's tax cuts in 2003 decreased

the top rate on "qualified" dividendslargely those held longer than 60

daysto 15%. But that tax treatment could expire in December.

A tax change could be pushed off, as there is increasing sentiment for

extending the Bush-era tax cuts by a year or two. But when lawmakers

reconvene on Nov. 15, they also could choose to enact President

Obama's proposal that the tax break only be extended forcouples making less than $250,000. In that scenario, the top

rate on dividends could rise by a third to 20% next year.

Whatever the case, "it's clear that dividend rates will never be

lower, so these investors are cashing in some holdings," said

Robert Willens, an independent tax expert.

The private-equity dividends are causing a divide on Wall Street

when it comes to payouts to investors. Unlike the private-equity-

controlled companies, cash-rich, publicly traded companies are,

for the most part, holding back on dividends.

"Private-equity funds are much more sensitive to taxes than public companies, pension funds, or mutual funds,because their performance is measured after tax," Mr. Willens said.

Fund-raising done at least partly to pay dividends represents 8.7% of the total amount of leveraged lending and

unk-bond issuance this year, said S&P. Questions about dividends come on the heels of other worries that the

unk market could become overheated as investors such as mutual funds, money managers and insurance firm

hunt for hard-to-find returns.

Dividend supporters say that debt sold between 2003 and 2007 to back dividend payments for private-equity

firms and others defaulted at an annual rate of 5.9%, compared with 7.4% of debt of companies being acquired in

leveraged buyouts, according to S&P.

In August, Dick Clark Productions, which produces television shows such as "Dick Clark's New Year's Rockin'

Eve" sold $165 million in notes in a deal that originally was supposed to be $150 million. Of that, the companywill pay $105 million to shareholders including Six Flags Inc. and private-equity firm RedZone Capital

Management LLC, whose chief is Daniel Snyder, owner of the Washington Redskins football team.

Moody's Investors Service gave the notes a B2 "junk" rating and noted the company's reliance on three annual

television shows, including the American Music Awards, plus the New Year's Eve special and the reality show "So

You Think You Can Dance." Norman Chirite, managing director at RedZone, said it was a "solid rating" and said

the potential tax change wasn't factor. "It was just the right time," Mr. Chirite said, noting what he said were Dick

Clark's solid lineup of shows.

Getty Images

Daniel Snyder

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A Six Flags spokeswoman confirmed the transaction, as did a spokeswoman for Dick Clark Productions.

In July, New York cable operator Insight Communications sold $400 million in debt to finance a $300 million

dividend to private-equity firm Carlyle Group LP and other shareholders. About $100 million is being used to

refinance debt, according to Moody's, which gave the debt a B3 junk rating and noted that the company has "high

financial leverage."

A spokeswoman for Insight, which operates cable systems in Kentucky, Ohio and Indiana, confirmed the

transaction. A Carlyle spokesperson said Insight still has low debt levels for a cable company, and that it is only

Carlyle's second U.S. dividend deal in the past year.

As for the deal Veritas is seeking for Global Tel-Link, which provides phone service to prisoners, it is expected to

leave the company with debt that is a substantial five times its cash flow. Veritas, which invested about $70

million when it bought Global Tel-Link last year, is expected to receive about $80 million of that $170 million,

according to people familiar with the matter, who note that the business has a relatively stable cash flow.

Write to Carrick Mollenkamp at [email protected], Gregory Zuckerman at

[email protected] and Laura Saunders at [email protected]


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