Carved In (Black) Stone
Glencore has suddenly found itself in a fine mess during the last month or two, with the way its stock has been circling the drain & finally got flushed down the toilet at the end of September. Considering the size of the company & the thousands of decent folk whose incomes depend on a stable economy, we all hope that it can do whatever is necessary to solve the problem & find its footing again...some time soon. But reality is more complicated than people would like; every financial hiccup is accompanied by consequences that affect not only the root of the problem, but entire sectors at a time. Glencore's market misadventures have put the spotlight on the numerous problems that spring from the attempts of various multinationals to get a foothold Down Under.
The latest major wrinkle comes in the form of KKR's investment in OZ Minerals. The investment has given rise to the debate of whether KKR will "do right" by the employees of OZ & the citizens of South Australia. So, from the perspective of an outside party, for example, a speculator or an analyst, what is the real issue? Are KKR's intentions really questionable or is this debate simply a discrete attempt to increase the advantage (& market influence) of a business rival? After all, if the solution to OZ's problems is taking on a financial services firm as a shareholder, then KKR isn't the only game in town; Blackstone would make a pretty fine candidate, too. This discussion is not about Australian corporate law; explaining & applying that is the jurisdiction of the relevant authorities. This week, we will explore the identities of the major players: in effect, this is a formal introduction to OZ Minerals, KKR & Blackstone.
OZ Minerals
The following paragraph is the company summary that Wikipedia offers on OZ Minerals:
"OZ Minerals (ASX: OZL) is an Australian mining company, formed from the merger of Oxiana Limited and Zinifex in 2008. In 2009, Chinese state owned China Minmetals proposed a purchase of the heavily indebted company. The Chinese proposal was one of three high profile moves by Chinese firms to acquire stakes in the Australian mineral sector in early 2009. The China Minmetals offer along with other proposed purchases, especially the Chinalco planned stake in Rio Tinto, caused great public furor, adding political pressure to block Minmetals. The Australian government blocked the sale on 27 March 2009, citing concerns about the location of the Prominent Hill Mine within the sensitive military area. A deal not including Prominent Hill was approved, and the majority of the company was acquired by China Minmetals; the acquisitions became the company Minerals and Metals Group (MMG). OZ now has only one major asset (Prominent Hill), but the sale more than eliminated the Company's debts, giving it cash in hand for operations. In 2011, OZ Minerals acquired the Carapateena iron-oxide copper gold deposit 100 km southeast of Olympic Dam."
The focus in the media is on Carapateena, but industry experts suspect that the real sticking point for the South Australian Government is the Prominent Hill issue. After all Prominent Hill was the reason that the Australian authorities had to take the more complicated path in 2009 when they needed Chinese assistance to save OZ from drowning in red ink. It seems the problem was simply shelved instead of being solved - which is why it has become a stumbling block for KKR six years later.
So the real question is whether KKR is trustworthy enough to handle an enterprise that is located in a sensitive military area, & if it is, can it convince Australia of its sincerity? In reality, there is no effective answer to the verbal question, "Can I trust you?", primarily because everyone will answer "Yes" whether that is the truth or not. The only way to prove a party has the capacity to keep a promise lies in the past record; but KKR has never dealt with classified information or sensitive locations before - assuming the public record tells the full story. While KKR has not responded to the situation yet, this means that outside parties like us have no option but to assess what is part of KKR's public record.
KKR & Co. L.P.
KKR was formed in 1976 in New York by Jerome Kohlberg & his cousins Henry Kravis (current Co-Chairman/Co-CEO) & George R. Roberts (current Co-Chairman/Co-CEO), all of whom got their start working at Bear Stearns. KKR speedily became the most famous enterprise for a new form of financial instrument known as the Leveraged Buy Out (LBO). As a matter of fact, it probably would have been a virtual monopoly in the LBO market today, were it not for its competitor Blackstone Group. KKR is responsible for some of the most pricey LBOs in financial history, such as RJR Nabisco in 1988.
KKR has total assets of US$51.427 billion, an annual revenue of US$8.896 billion (2013 figures) & offices in 10 countries, which are:
01. The United States (company headquarters)
02. The United Kingdom
03. France
04. The People's Republic Of China
05. Japan
06. India
07. The Republic Of Korea
08. The United Arab Emirates
09. Brazil
10. Australia.
KKR focuses on the sectors of financial services, private equity & investment banking. It does this through 9 dedicated investment groups, which are:
01. Chemicals
02. Consumer Products
03. Energy & Natural Resources
04. Financial Services
05. Healthcare
06. Industrial
07. Media & Communications
08. Retail
09. Technology
The Blackstone Group
Blackstone came into existence in 1985. It was founded by Peter G. Peterson, former Chairman of the New York Federal Reserve (2000-4), & Stephen A. Schwartzman, former head of Lehman Brothers global M&A team & current Chairman/CEO of Blackstone. While Peterson & Schwartzman had actually created Blackstone to enter the private equity market, it wasn't until after the October 1987 Stock Market Crash that they managed to get a foothold. Ever since then, it has been a 24/7 competition between Blackstone & top rival KKR for supremacy in the LBO market.
Blackstone has total assets of US$31.510 billion, an annual revenue of US$7.484 billion (2014 figures) & offices in 11 countries, which are:
01. The United States (company headquarters)
02. The United Kingdom
03. France
04. Germany
05. Spain
06. The People's Republic Of China
07. Japan
08. Singapore
09. India
10. The United Arab Emirates
11. Australia
Blackstone focuses on the sectors of financial services, private equity, investment banking & alternative asset management. It's activities are organized into 4 business segments, which are:
01. Corporate Private Equity
02. Investment Banking & Financial Advisory
03. Marketable Alternative Asset Management
04. Real Estate
KKR is older (& richer) than Blackstone, which means it wins hands-down when it comes to experience in general. But Blackstone still might have a fighting chance on the issue of global coverage & experience in dealing with defense-related investments. In 2003, Blackstone completed the acquisition of TRW Automotive for an impressive US$4.7 billion, while TRW's parent company was acquired by well-known defense contractor Northrop Grumman.
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