Deal dead and buried

Private equity and debt deal of the century ends. See the full story here.

The key reason why the biggest leveraged buyout ever was killed was that it
didn't live up to a "solvency opinion" -- a declaration by auditor KPMG that the
company would have been solvent after the takeover loaded it with billions in
fresh debt.

Posted by Anastassia Kobeleva

Raising Capital for SMEs

I had to cancel a meeting today with a Bay Street lawyer. He commented to me that if you have a client deal to do, treasure it because these are dark days.
Last night I was at the RBC Women Entrepreneur of the Year awards and Diane Francis of The National Post was there and also commented frequently on the tough days we are facing. There was a ripple of agreement through the room of 2,000 female entrepreneurs. The Publisher of Profit magazine brought some light to all this gloom and doom telling us about research that recessions and depressions first begin to lift in the SME sector. Our target market - Loewen & Partners, that is - is the SME with revenues of $10M+ and it’s true that there is private equity investment dollars available.
Quite heartening.

You've Got Talent But...

J.B. Loewen's blog about Dragons' Den:

It’s time for another game of Crack the Whip with Kevin O’Leary at the head and the entrepreneur at the end.
And we were not disappointed as the Dragons’ Den show opened with Elke presenting her Lump O’ Coal, a Christmas stocking stuffer. Robert Herjavec thought it was cute but as Elke brought out her red Lump O’ Coal for Valentine’s, and so on, Arlene saw the flaw - Elke really had a single product for the investment opportunity.
There is only one thing that bothers Kevin—SKUs!
We’ve covered the topic of SKUs (Stock Keeping Unit) before with past Dragons’ Den presentations; Kevin means that the cost of managing and delivering single unit orders will eat up the profits. Think shirts: If you only had one design of shirt, you can see why delivering orders of one shirt to many stores would not be cost effective. To scale up, a company needs a wider range of products to pack for each client, otherwise you will be SKUed. And with that, Kevin skewered the deal, saying, “Deep in your heart, Elke, you know Lump O’ Coal will be a lump of you-know-what.”
Arlene tried to reason with Elke and said with a calming smile, “Cut through the harsh criticism (I’m really sorry you have to listen to Kevin) and hear the very good advice (Kevin is not such a ‘nothing burger’, he does teach at an important Business School).”
What Arlene was trying to explain is that an equity investor needs to make returns of above 20%, but by no means is Elke in a bad business. A single, seasonal product will simply not attract investors like the Dragons, and she would be better off getting debt financing or a government loan from the EDC. Quite rightly, Jim Treliving also respectfully advised that the company was a nice cottage industry and to keep it that way.
Single SKU companies can work and we saw this with a previous presenter – Sue and her Omega Tree Stand – who did well after fizzling at Dragons’ Den. Getting exposure on the show resulted in orders coming to Sue—landing her Canadian Tire and big-box stores high volume orders.
That doesn’t change the fact that for venture capital, the Dragons made the right decision, but thanks to Dragons’ Den, Sue got the free marketing exposure to get her phone ringing.
W. Brett Wilson, who is more used to coal as a source of energy, squinted in his tough guy way and rasped, “But why would anyone buy a lump of coal?”
Being of Scottish descent, I know that the Lump O’ Coal comes from the tradition of having a tall, dark stranger with a piece of coal for your fireplace be the first to cross the threshold in the New Year (Fabio look-a-likes being particularly popular with the ladies of the house.)
But I digress.
Let’s get back to Robert Herjavec, he of the matching tie and handkerchief sets, with his agreeable—almost rakish—way of chatting with entrepreneurs. It’s evident that Kevin doesn’t want to be any entrepreneur’s Facebook friend, but Robert’s warmth will soothe entrepreneurs, getting them to relax. But it was not enough to calm the nerves of the laid-off auto worker team, Jason and Leigh, as they presented their wall calendar. Arlene, being a single mum of four children herself, knows what it is like to co-ordinate family and commiserated that a shared wall calendar sounded good but, like some Nanny 911 ideas, hard to follow through.
Indeed, Kevin wished he could fire his family for their slacker ways over schedules.
When unpacking what went wrong afterwards with Dianne Buchner, the Den’s insightful host who adds helpful hints, Jason said the presentation was not good enough.
Ouchey! I wondered if Jason’s wife, who did the lion’s share of the presentation, was thinking, “Buddy—you’re not getting any for the next month!
There is a great deal of ambiguity in investing and each Dragon has their style. One Dragon might love your product but another one not be remotely interested. Throughout this season, the rookie Dragon, W. Brett Wilson, has been the shining light for entrepreneurs, coming through to invest in people he sees are trying their best or with a unique product. Likewise, we see Kevin O’Leary invest with his strict set of rules which, luckily, he teaches us.
We saw Brett do a handshake deal for a million dollars with a green energy technology entrepreneur, the big prerogative being IF Magnacoaster passes through the due diligence process and does what the entrepreneur says it does. Then Brett returns to Moxy Trades with a reduced offer, and clinches that deal. Finally, Brett and Arlene both shake hands with the First Memories Photobook team. After all, new mums can never have enough pictures of their baby snuggle-muffins.
What happened? Two words.
Deals done.
Clearly, Brett is a Dragon ready to invest and I love the “Kaching, Kaching” noises inserted every time there’s a handshake.
Finally, up comes a magic show, Illusions Dinner Theatre - would Brett sign up another entertainment act? Would we see more of Big Jim’s smooth dance moves which rival the Four Tops? To the bemusement of all, Robert volunteered for the magic act. Whoa! Robert, what were you thinking? By that stage, had the entrepreneur, Don, already sensed the deal was not happening? He could have been planning a horse’s head under Kevin O’Leary’s bed. Now you’re going to let him stick knives in your head?
Repeat: Knives and Dragons are a dangerous mixture—especially when the entrepreneur may be unhappy with the “no investment” decision.
Again, the Dragons enjoyed Don’s talent show but real estate financing is not the typical type of deal that equity investors do. As Big Jim advised, “It was a great show but cabaret acts last twenty months. Get to a bigger place, like Vegas, and don’t get saddled with real estate.”
And that’s all folks.
I’m sure you will agree that Dragons’ Den has succeeded in pulling back the curtain of mystery to reveal what are the features of a business every entrepreneur must be able to discuss with a potential investor. The Den is a gateway into how to be a great entrepreneur and, if you watch the whole season on the website, it’s an MBA course in Entrepreneurship 101—minus the school fees. Many of the presenters asking for investment dollars in the Den are Creative Achievers—people who do not fit the traditional management career track, who take risks and who change the world a little or a lot. Probably all of the Dragons fall into this category. None of this season’s presenters need bother with an MBA, and with Dragons’ Den giving many a jump start, they will be phenomenal.
Kudos to CBC for creating the Dragons’ Den website with the Forum where fans can blog. I think it has elevated the level of transparency and trust – a boost for the CBC brand. Also, the updates on companies from the show as they begin to blossom with a little help from their Dragon investors, is proving to be a terrific platform for Canadian enterprise. We can find out more about EcoTraction, for instance, which reminds me to buy the eco-salt for my doggy’s paws, as well as anything sporting the Dragons’ Den logo. The CBC showcases how an investor might work for your company by cross-selling products. Quicksnap goes to Afghanistan with CDs of a Canadian country singer who also wears Hillberg and Berk jewellery. Here you see three products, two from Dragons’ Den, being cross-marketed in a compelling way.
Watching the video of Quicksnap in Afghanistan though, with the enthusiastic Afghanistan gentleman enjoying the music, was the best Christmas present for me this year, bringing tears to my eyes. That is the true heart of business.
Before I get too schmaltzy, better close.
Dragons’ Den is my (and I suspect for a lot of you too) weekly passion. Now, as the season draws to a close, what are we going to do? Here’s an idea—the CBC has taken a leaf out of the play book of Gene Simmons’ success with KISS, by marketing the band of Dragons. I recommend wearing your favourite Dragon T-shirt to do your grocery shopping on a Saturday morning; it will probably improve your dating odds. Can you see it now—Arlene bumps into Big Jim in the tofu aisle.
I’ve said it before but even Kevin will agree Dragons’ Den is a great use of our tax payer moneeeeeeeey.
See you on January 11th.

Private Equity: Up, Up and Away

Job losses in the United States are the early cough of the venerable cold Canada will catch soon enough.  Unemployment statistics out of the U.S. released last weak showed jobs are being shed across the whole economy and at a faster rate than expected.  Big, infectious coughs, blowing up over the Adirondacks and into our backdoor. 

Though many fund managers will tell you that they have barrels of "dry powder" stowed away in their coffers (aka, cash ready to invest), the reality is that the powder is being preserved for a much larger offensive likely to begin during the typical (military) campaigning season, beginning in the Spring.  In the same breathe, they will explain that the deal flow they are seeing right now is actually greater than it was a year ago, but the caveat is that the quality of the deals are not as good.  

There are a few reasons for the increased deal flow.  Private equity's growth in the new millennium, largely due to increased private savings of a wealthy middle class, began to pique the interest of newsmen and women the world over, but it's popularity struck most significantly in 2007 with the advent of the blockbuster deals.  Beginning in the summer of 2007, just after the green movement fell out of vogue and before the sub-prime crisis began spilling ink, private equity was all the rage in newspapers across the continent and in Europe. Blockbuster deals like the buyouts of BCE, TXU Energy, and Chrysler splashed across the front pages of newspapers across the globe; the private lives of fund managers were being written about, from their their cop orate jets flying all across the world, to lobster dinners on Fifth Avenue.

So with lower quality deals blowing in the door, fund managers have grown more discriminating in regard to what they would deploy their 'dry powder' into.  This is leading to a great many "orphaned deals" disseminating throughout the market.  Generally speaking, the public market is trading shares at half their value from a year ago and a fund manager won't invest into a private company at a greater price than he can invest in a comparable public company, which means that the value of private companies are being depressed at this time as well.  At first light of market stabilization, the dry powder will begin to be deployed at an incredible rate, as funds compete to snatch up companies still trading at relatively low multiples, getting more equity for their investment dollar.    

Though the Canadian economy will inevitably be pulled along with the current global problems, look for activity in the private equity market to signal a recovery.  Fund managers are intelligent and have the flexibility to creatively carve out the returns they crave, but they are not superheroes, and will wait until the volatility gives some indication of subsiding.

 

Tough Times

Who's next?
Sure, it's tough times out there and the banks are not helping.
Currently the government is reaching out to the business community to find out if the banks are lending as they are claiming. I was contacted by the Canadian Venture Capital Association (CVCA) to add in our experiences over the past few months as Loewen & Partners places deals.
The banks are stuck between a rock and a hard place. This is not a sub prime crisis – it’s now a credit crisis.
Apparently, the banks are showing the government figures and reports that they are lending - they even had an 11% growth in lending this last month.
When you dig a bit deeper though, and ask if this is new lending or established lines of credit being drawn, the real picture emerges.
Business owners who are established clients are pulling down their lines of credit and tucking it under the mattress. That is not new lending on the books.
Loewen & Partners met with RBC this week and it was refreshing. RBC is doing something counter intuitive to all the other banks. They told us, "We want to lend." They say they are open for business.
As one of the account managers told me, “People remember how you treat them in the tough times.” RBC will probably scoop up some clients for life in this next year with this strategy and it will build a rock solid brand, one customer at a time. Smart work, RBC.

Hand-Written Notes Improve Your Brand

There is a great deal to be said for the hand-written note. The habit of actually picking up a pen and writing a quick comment to someone has faded away as emails and cell phones grew in use. A thank you note, even with scratchy hand writing, still brands the writer as someone with style; a note packs a wallop and makes your message stand out from the crowd.
I received a hand written note penned by one of Loewen & Partners’ clients thanking me for getting their company into the Ernst & Young Entrepreneur of the Year awards.
The company owner, Patrick Bermingham, wrote that he was amazed to win in his category, manufacturing. His company, Bermingham Construction, has received a great deal of recognition since, he tells me, from clients and that the award was also a huge moral boast for his employees.
Bermingham recently decided to move his company up a notch and with Loewen & Partners' corporate finance assistance, bring in private equity partners, C. A. Bancorp. This has not been easy sailing to get employees to buy in or even the owner, Patrick Bermingham. To win an award as prestigious as Entrepreneur of the Year helps ease the situation and reminds everyone that the business is doing very, very well. But it does take work for which Loewen & Partners did not get paid to do.
So will I do something extra that I do not get paid for again for Patrick?
Absolutely.

Live Long and Prosper

Need to be revved up and pushed back out into the market place? Here’s a great place to go and get inspired. It’s Rick Spence’s video series on how to get your business started but it applies also as a quick reminder for those who have been working at it for years.
At Loewen & Partners, we are using the marketing plan video as the base for doing our plan for next year.

Dragons Bail on Yet Another Deal

The CBC show, Dragons' Den, is in serious danger of getting the same tarnished image that tinged the British show - the Dragons will not close the deals they agreed to do on national TV. There are all sorts of excuses.
Again, after the Uno letdown, Brett Wilson is left alone holding the bag to finance a great product, Ecotraction, and finally, this is getting noticed by the newspaper journalists. Mary Teresa Bitti, Financial Post writes, "all five (Dragons) agreed to put up a combined $500,000 for a 25% stake." They blame their change of heart on the market collapse.
That's a convenient excuse.
There are two types of investors: those that do it for a living and those who have made it, and invest their own money. The Dragons are supposed to be in the later category. Surely, they can afford $75,000 each on a product with guaranteed sales? Or maybe not?
I have a spread sheet tracking deals declared and deals done. Email me if you want a copy to see how much these Dragons are actually putting into our Canadian entrepreneurs. CBC should be asking Arelene Dickinson and Brett Wilson if they have any buddies who want to be Dragons and kick out the others who don't cough up the dough.

Which Dragon Invests the Least?

Here’s a challenge for all of CBC's Dragons' Den armchair investors. You have been riveted by these intelligently selective Dragons sifting over the business ventures brought into the Den. Now it’s time to swivel your armchairs away from the entrepreneurs, towards the Dragons.
First up, let’s do a little of our own “Due Diligence.”
If you pull up the CBC Dragons’ Den website and find Trent Kitsch’s record of past episodes, he helpfully lists the dollar value of the deals made and the Dragons who committed capital, making it easy to jot down the investment record of each Dragon. Since Trent’s blog only goes up to Episode 8, I may be missing a deal here or there, but I think there’s enough to chew on the interesting statistics.
I invite you to examine the Dragons’ Score Card (at the top of this blog) where next to each Dragon’s name, you will find the number of deals done and, as Robert Herjavec likes to say, “money put at risk”.
So chaps, how’s the investing going?
From my calculations, our Dragons from Alberta are demonstrating why they are the “have” province and Ontario is the “have not”. W. Brett Wilson and Arlene Dickinson committed to 18 deals and $3.2 million in investments.
And surprise, surprise – what do we have here? The lowest investor is the one with the most bluster. It’s dear old Mr. Kevin O’Leary. Well, well, well.
Jack Welsh, the leader who took General Electric (GE) to the top of the stock market, had a firm but simple rule: the bottom 10% performers of the work force got fired – every year!
Sounds cruel?
Well, Kevin has been telling us all season that the market is cruel, so why shouldn’t the market bite down hard on a low investing Dragon? Why should it just be the presenters who have that unwanted feeling of hot adrenaline?
By the current rules, the Dragons are not under any obligation to spend a dime, but surely they should be under pressure? After all, in the real world, investors have their laws of the marketplace too. If they don’t invest, they obtain a low return on their capital, and if they are managing other people’s money and don’t have the ‘ovaries’ (or other body parts) to place it, that cash would be taken back rapidly.
If an investor does not commit dollars to companies, the only return they are making is on their original lump sum of capital and what’s the point of that? Kevin should know better than any as he runs a fund and, for sure, works within this rule. Right now, Kevin has the lowest record for investing capital and for that, to coin one of his favourite phrases, “he should be blowtorched out of existence.”
A common complaint by investors in the real world is that they don’t see good enough deals, and I suspect that the Dragons would say the same about the visitors to their Den, “They’re a little subprime, not likely to profit.”
Pardon me, but all sorts of idiotic things do well. The game Trivial Pursuit got turned down by hundreds of Angel investors who thought it was too dull. I still love mood rings, tiny troll dolls with pink hair, Billy Bee Honey but who would’ve invested in those things at their start? Even Barbie had its troubles getting launched.
That’s an excuse.
With the celebrity of the Dragons, many of the company products could gain some momentum. Surely, with several Dragons pitching in with their skills and rolodexes of global contacts, they could achieve something?
Ya’think?
Ah…but Kevin would say he adds valuable entertainment which should be factored in to his score card.
Fair enough.
Although, the Dragons’ Den is a display of Canadian entrepreneurship, it has to be watchable and it’s an added benefit that Kevin does an exceptional job of teaching. Our Canadian show is far superior to the British version because we are fortunate to have entrepreneurs with deep experience: Jim Treliving adds gravitas, Arlene Dickinson mixes in marketing sense, Brett Wilson brings formidable gunpowder, Robert Herjavec has spark and it is exciting to see Kevin grasp onto entrepreneurs and drag them flailing around the Den. People going on the show do realize there must be good ratings, but the fair swap is that there is a real cash opportunity too.
If it’s ratings the CBC needs, maybe one of the entrepreneurs could come back on the final show and say, “Kevin, you’re out!” push him shouting across a moat and as the draw bridge pulls up, a sofa-sized dragon could lunge at him.
Is it possible that he could even scream?
You have to admit, that would make great entertainment and since ratings are a factor in this materialistic, greedy, money-grubbing world of ours, a scene of a Dragon’s demise would be of enormous interest to more than a few viewers.
Which Dragon would you roast?
Right – so we are agreed then. Here are the new rules for the Dragons: lowest cash investor, you are the weakest Dragon. In Kevin’s words, “You’re a nothing burger”. You’re off the show!
Now, that’s entertainment.

Cluster$%#@ to Power

This is the worst possible scenario.  Amidst the most severe economic turmoil since the Great Depression, Canadian politics got interesting.  Not good.  Of course, I hope no one is under the impression that the concerns of the guerrilla faction, namely the leaders of the opposition parties, is entirely concerned with the absence of a stimulus package.  The plans for this coup were put in place weeks ago by Jack Layton and the Separatists; and there could not be a worst time to be getting politically creative, it will be the economy that suffers.

Canada's economy, still regarded by many as a bastion of stability amidst the world's other large economies, actually exceeded analysts' expectations last month while others continue to falter.  The country's gross domestic product expanded by an annualized rate of 1.3%, the fastest in a year, last month, a month which saw some of the most volatile stock market movements in 20 years.  While Britain and the U.S. wane under the pressure of the crushing lack of credit, Canada's approach has squeezed stability and modest growth from our industry.  Obviously, it is unlikely that this will continue with exports declining as they are (1.4% last quarter, the fifth straight decline), but a rash, emotional approach to this situation will destabilize confidence and certainly create uncertainty.  The wherewithal of a coalition government, one led by Dion and backed by socialists and separatists, is, though historic, an unlikely, unproven, and confusing alternative to what is in place now.  

The Canadian dollar will certainly depreciate as a result of this politically driven turmoil, and considering the fall in commodity prices and weakened American demand, will not prove advantageous to the Canadian manufacturing and resource industry.  Interest rates will rise in pursuit of fleeing capital, which will make credit even less accessible, making investment in infrastructure and development less productive and less profitable.  

A stimulus package from a coalition will undoubtedly be influenced considerably by the NDP, preying upon the acquiescence of the Liberals, desperately clinging to power.  A socialist stimulus package would likely be focused on consumers rather than industry.  Rather than corporate tax breaks and subsidies to provide incentive and support for investment in infrastructure to support sustainable growth, for example, the coalition would benefit most from a package that pacifies voters with consumer focused incentives, such as Bush's tax rebate that delved out about $1,200 to each citizen in the U.S. last February.  As Bush's example showed this type of incentive program would prove ineffectual, even disastrous, since consumers are free to spend as they wish.  The $1,200 that Bush dished out went, in large part, to foreign exports, which is no help to the domestic market, some even stashed the money in the bank for darker days, like today.  The Liberals do have some economic heavyweights that seem poised to act as advisers, if a coalition is to take over governing, who would likely see the impracticality of this approach.  The issues are that the Liberals may have no choice in the matter and as a result, no one knows what is in store or who would be involved or in which capacity.  

The point is that the very economy that the coalition says it's protecting will suffer on account of their actions, certainly in the near-term, likely in the long.  The cornucopia of potential quagmires we are headed towards if we are led by a coalition government of liberals, socialists, and separatists is a distasteful, abhorrent, godless thing to behold.  Of course, the Conservatives are not without blame in this mess, and there are points in their fiscal update that definitely deserves vilification, but to usurp the government as its walks a tight rope through these volatile times is hypocritical to the very cause the coalition seems committed to resolve.  In the long-term, this may prove as politically disastrous for the liberals, NDP, and Separatists, as it will prove to the economy in the short-term.