The New York Times has managed to get its hot mitts on a heavily redacted complaint in a class-action lawsuit accusing Bain Capital and other private equity firms of conspiring to keep the prices of buyout targets low. In other words, it accuses them of basically carving up the universe of private-equity targets like a big pie and doling the pieces out to each other. More profit for everybody, sort of like the drug-dealers' cooperative in "The Wire."
It might be a little tricky, however, to tie these deals to Republican presidential nominee Mitt Romney, Bain Capital's founder and former CEO, who claims to have stepped down from an active role at the firm before they happened -- although Romney has continued to benefit passively from Bain's profits on the deals.
Romney and Bain lawyers say he was not actively involved in Bain at the time of the deals and had nothing to do with them. His name is not mentioned in the complaint. In fighting the Times' request for the document, the lawyers argued that the "election should not serve as an excuse to allow the press to get at confidential documents and upend competitive sensitivities."
The document ultimately doesn't reveal all that much new about a case that has been brewing for years, and it likely won't cause much damage to Romney's political chances -- certainly no more than he seems capable of doing all by himself. But it does offer just the slightest peek into the rarefied world of private-equity dealmaking that most people should find interesting.
The lawsuit against the private equity firms arises from what were known as "club deals" at the height of private-equity buyout fever in the mid-2000s. Bain and other firms pooled their billions to take down huge targets such as Texas utility TXU and health-care company HCA, setting buyout records that still stand. According to the lawsuit, these teams also managed to talk other private equity firms into abstaining from bidding on targets.
The complaint in the case apparently has the contents of incriminating emails that suggest the firms were colluding, in a scheme that it says involved 11 firms and 19 deals from that era. Unfortunately, most of the good stuff is blacked out of the copy obtained by the Times, which had to fight Bain's lawyers to get even the redacted complaint made public. In one of the few visible parts of the document, the complaint says private equity firms "heeded" a call by Kohlberg Kravis Roberts that they "step down" from bidding on health-care company HCA, which Bain, KKR and Merrill Lynch teamed up to buy in 2006 for $32.1 billion, setting a record at the time.
According to the document, Bain, KKR and Merrill paid $51 a share for HCA, which was "only" 17.8 percent more than the company's stock price the day before the bid. That sounds like a decent premium, but the complaint says it thinks HCA shareholders could have gotten a lot more for the company -- at least $1 billion more. It says that another private equity firm, Blackstone Group, thought HCA could have been worth $1.6 billion more.
But Blackstone didn't make a bid, and neither did Goldman Sachs or a bunch of other private equity firms, all of which bowed out of the bidding just 48 hours after the Bain deal was announced -- even though HCA had 50 days, during a "go-shop" period, to find a stronger bid. KKR went on to nearly triple its initial $1.2 billion investment in HCA, according to the document. The complaint doesn't mention Bain's profits on the deal, but they were probably pretty substantial, too.
The private equity firms deny they were colluding to keep prices low and say the complaint reveals nothing illegal, just normal negotiating tactics. They also argue that companies were hardly cheap during the buyout boom of the mid-2000s, and that maybe the buyout targets should just count themselves lucky they were bought at all. Though many of these targets have produced billions in profits for the firms, not all of the deals have been big money-makers. TXU's private-equity investors, for example, lost billions after natural-gas prices collapsed.
"It’s hard to believe that PE firms –- a competitive bunch -– would conspire to not compete on certain 'Golden Age' deals, while fighting like cats and dogs on others," Fortune editor Dan Primack wrote in his daily "Term Sheet" newsletter.
It is hard to imagine Goldman, Blackstone, et al., backing down from an opportunity to make a profit and hard to imagine what might have motivated them to do so. The complaint mentions some internal emails at private equity firm TPG, talking about how that firm backed down from bidding on HCA because "our relationship with them, KKR and Bain was more important." But without seeing more of the complaint -- the Times only links to 9 pages -- it's hard to get much of a sense how much evidence of collusion the plaintiffs really have.