Carlyle Group Carves Itself A Future

By Will Ashworth | September 10, 2012 AAA
DuPont (NYSE:DD), United Technologies (NYSE:UTX) and Societe Generale (OTCBB:SCGLY) have something in common. All three companies have sold or are in the process of selling businesses in 2012 to Carlyle Group (Nasdaq:CG), one of America's largest private equity firms. It seems Carlyle is pursuing carve outs, the firm's bread and butter when it was founded back in 1987. What does this mean for shareholders? I'll have a look.
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Deals
Since July 25, Carlyle has purchased United Technologies' Hamilton Sundstrand Industrial unit for $3.46 billion in conjunction with BC Partners, Societe Generale's TCW asset management business with existing management, and DuPont's Performance Coatings division for $4.9 billion. Through the first eight months of the year, it has agreed to $16 billion in deals, with the UTX and DD purchases accounting for about half of the total amount. Large companies these days are keen on selling businesses that don't fit into future plans and private equity firms like Carlyle, given the low cost of financing, are more than willing to take them off their hands. In three to five years these carve-outs will be sold to a strategic buyer or taken public. It's a win/win situation.

Its corporate private equity segment is one of four pieces to the Carlyle puzzle. In the three months ended June 30, the segment generated $130.5 million in fee revenue or 53% of its overall total. Corporate private equity advises 20 buyout and nine growth capital funds with $53 billion in assets under management with $37 billion earning fees, which means it has $15.3 billion in capital yet to be invested. Its Carlyle Partners V (CP V) U.S. buyout fund accounted for 17% of total management fees in the quarter and the Carlyle European Partners III (CEP III) buyout fund accounted for 10% of total management fees.

Together, the two funds represent $20.3 billion or 34% of its total assets under management. CP V was a part of all three acquisitions mentioned above and CEP III was part of the DuPont acquisition. Of the $13.7 billion in capital committed to CP V, approximately $9.2 billion has been invested, or 67% of the total. That leaves it with $4.5 billion in capital to invest in the U.S., which translates into a total enterprise value of $15 billion based on 30% equity into each deal. With approximately $15 billion in transactions to pursue, I'll assume Carlyle makes three separate acquisitions for $5 billion each.

Po

tential Targets
My first potential target is 3M's (NYSE:MMM) display and graphics segment, which specializes in optical films for LCD displays and other electronic devices. That part of the business makes sense, given its history, but it also manufactures and sells digital and overhead projectors as well as touch-screen systems. In the first six months of 2012, the segment generated $1.7 billion in revenue and $342 million in operating income, the lowest profit margin of its six operating segments. In 2011, its revenues for the entire year were $3.67 billion. At a multiple of 1 to 1.5 times sales plus debt, Carlyle would be in the ballpark.

My next possibility is a bit of sleeper. In 2003, Berkshire Hathaway (NYSE:BRK.B) acquired McLane Company from Walmart (NYSE:WMT) for $1.45 billion. At the time, its revenues were approximately $22 billion, with Walmart accounting for 35% of revenues. In 2011, McLane generated $33.3 billion in revenue, with operating earnings of $370 million. It bulks up Berkshire Hathaway's revenues but does little for operating profits. Buffett paid 7 cents for each dollar of revenue. If Carlyle could get the same deal today, it would cost $2.3 billion to purchase the distributor. It could then make some bolt-on acquisitions to grow the business, while figuring out how to make it more profitable. That's easier said than done and Buffett's not likely selling, but you never know.

The final possibility is another smaller acquisition in Apex Tool Group, a manufacturer of power and hand tools under various brand names, including Lufkin and Cleco. Danaher (NYSE:DHR) and Cooper Industries (NYSE:CBE) formed a 50/50 joint venture in July 2010, combining the assets of each company's tool group. With revenues of approximately $1.2 billion, Carlyle likely wouldn't have to pay more than one times revenue to make the deal happen. Given that Danaher and Cooper aren't spending a lot of time or focus on Apex, it would probably be the easiest of the three deals.

The Bottom Line
The faster Carlyle can get the remainder of its $15 billion in dry powder invested, the sooner it can maximize its fee-based and performance-based revenues. When it does, shareholders will begin to see a better performing stock price.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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