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The empire strikes back. General Electric has tried spiking one of private equity’s guns by saying that leading firms cannot join together to bid for its plastics division. That is all very sensible. The Department of Justice investigation into “club deals” gives a nice reason for imposing such an auction rule. But GE’s real motivation is probably more practical. The mooted $10bn price tag is within reach of the individual “mega-funds” raised by the private equity industry in recent years. And the more bidders in an auction, the higher the price should go.
That said, with debt markets in their current jubilant state, private equity “conglomerates” retain a formidable arsenal compared with GE – including their ability to ring fence individual assets, to load them more aggressively with debt and to incentivise individual management teams more effectively. Also, the very fact that GE is selling the business provides a stark reminder of another disadvantage: GE is beholden to restless public shareholders and the strait-jacket of short-term earnings. Private equity firms can take a multi-year view.
GE’s plastics business, hit by high raw material costs, has been a quarterly blemish on GE’s results. Jeff Immelt feels under enough pressure to sell it, despite saying only last month that the negative impact on margins from benzene prices was “a one in 100 case”.
If GE’s chief executive is correct, there could be a serious opportunity for private equity bidders willing to be patient and bet on a turn in the cycle. Does that mean that GE will be prepared to retain a stake in the business – as it has with disposals in the past – to ensure that it does not miss out on any bounceback completely? If private equity firms cannot form their own consortia, perhaps they should be looking to club together with GE itself.