Competition issues arise for private equity bidders

By Bruce Lloyd.

Key Points:
Competition issues for private equity bidders generally arise from their own behaviour in relation to a bid, or their investments in the same sector.

Two main issues arise for private equity bidders:

Behaviour by members of consortia in relation to a bid which gives rise to competition concerns in relation to the acquisition itself

At the end of October 2006 the US Department of Justice sent letters to KKR, the Carlyle Group, Silver Lake Partners, Clayton, Dubilier & Rice and the private equity arm of Merrill Lynch. The letters reportedly asked for information about each firm's bidding history, its partners in the bidding process, and the timing and the nature of pricing changes in the options. In essence, the Department's letters are seeking information on why the private equity funds decided to form (or not form) a consortium and whether there have been any agreements to bid (or not bid) against another consortium for the acquisition of private and public companies.

The Department of Justice appears to be investigating issues which are of potential concern for private equity firms in Australia. Consider these scenarios:

• a target company claims it did not get a fair price because it originally had three interested bidders and once bids came in, there were only two bids because two of the bidders decided to work together;
• a target company claims it did not get a fair price because it originally had four interested bidders and once bids came in, there were only two bids because two of the bidders dropped out of the bidding.

In addition, the plaintiff class action bar has filed antitrust suits in relation to concerns arising from the private equity bids for Univision and Harrah's Entertainment during 2006 in relation to bidding conduct by private equity firms.

Where bid members may have horizontal or vertical investments in the same sector which could give rise to concerns in those markets

This was examined in the Airline Partners Australia/Qantas deal with Macquarie Bank's interests in Sydney Airport Corporation (see Linda Evans' article in this edition.)

For example, the US Federal Trade Commission has imposed separation conditions in this kind of matter in January 2007 in the energy sector on the Kinder Morgan bid owing to an existing investment in Magellan Midstream in the same market by private equity bidders Carlyle and Riverstone).

The ACCC has not, to our knowledge, yet commenced any investigations into the conduct of private equity firms in Australia, but it is clearly important that private equity firms understand the risks which exist here, particularly the automatic breaches which can arise from arrangements between them as to which targets they will bid for and how they structure bids.