Hellman & Friedman to buy Goodman Global; Harman shares fall; Bear Stearns shares up on Citic alliance

By Sheri Kasprzak

New York, Oct. 22 - Even though market conditions are making banks think twice about leveraged buyouts, Goodman Global, Inc. will be bought by affiliates of private equity firm Hellman & Friedman LLC in a $2.65 billion deal.

On the other side, though, Harman International Industries, Inc. said Monday that its proposed merger with Kohlberg Kravis Roberts & Co. LP and GS Capital Partners has been called off. Even so, the two will take on $400 million 1.25% senior convertible notes.

GS and KKR had backed out of the deal in September, but on Monday, all parties agreed to leave the deal without taking it to court.

Private equity firms may be one of the few places where leveraged buyout deals are still being done, according to market insiders.

"Banks are not looking to take more losses," noted one sellside trader Monday.

The trader said Monday morning that he feels private equity firms will likely be forced to use some equity in new deals, echoing the sentiment of another sellside trader from last week.

Even so, the Goodman deal will be done completely in cash at $25.60 per share.

"The LBO firms will try to wiggle out of deals that were done with Old World structure and terms. New deals are being done with more equity in smaller size," said another source. "Big LBO firms will have lower fee income, less headline glory and have to spend much time and efforts tending to companies already in their stables to get the cash flows they require to pay their debt loads. With [a] slower economy forecasted, I see these causing major issues for them going forward."

Goodman to be purchased by Hellman

Moving back to the Goodman acquisition, Hellman & Friedman, a private equity firm, has agreed to pay $25.60 per share for all of Goodman's stock, a 17.2% premium to the company's $21.84 closing stock price on Friday.

Just after the opening bell, Goodman's stock was up 13.05%, or $2.85. The stock closed the day up 11.86%, or $2.59, to end at $24.43 (NYSE: GGL).

The all-cash transaction is set to close in the first quarter of 2008.

Hellman & Friedman will finance the purchase with $1.1 billion in committed senior secured credit facilities from Barclays Capital, Calyon New York Branch and GE Commercial Finance, as well as other vehicles managed by GSO Capital Partners and Farallon Capital Management, LLC.

"Goodman is uniquely positioned in its markets," said Philip Hammarskjold, managing director of Hellman & Friedman, in a statement.

"Through best-in-class operations, the company has demonstrated an ability to deliver both outstanding value to the dealer community and exceptional performance to its shareholders. We are looking forward to partnering with the management team and being a resource for the continue growth of the business."

"After a thorough review of the strategic options available to the company, we have concluded that this transaction will both reward our current stockholders and position Goodman for continued profitable growth," said Charles Carroll, Goodman's chief executive officer, in a news release. "With the support of Hellman & Friedman, we expect to further enhance our position in the residential and light commercial HVAC marketplace as the value leader with a low-cost structure."

Houston's Goodman Global makes residential and light-commercial heating, ventilation and air-conditioning equipment.

Harman deal called off

In deals that didn't make it, a planned $8 billion merger agreement between Harman International and GS Capital Partners and Kohlberg Kravis Roberts was terminated without going to court.

The two prospective buyers said in September they had no intention of going through with the deal, citing a "materially adverse change" in Harman's business.

"I think it's a positive on all levels," said one analyst. "They're not going to court and I think it could have gotten ugly like a lot of suits get. They're [the prospective buyers] buying [Harman] notes. As situations like this go, I think it ended pretty well. It's not surprising that it ended because the market is such that deals like this are breaking up all the time now."

Harman's stock was off by 82 cents early in the session. The stock fell by 53 cents on Monday to end at $85.87 (NYSE: HAR).

Even though the merger is kaput, GS and KKR have agreed to buy $400 million in 1.25% senior convertible notes, which are convertible at $104 each. The proceeds from the sale will be used for Harman's accelerated share repurchase program.

"The significant stock repurchase we announced today underscores our board's confidence in Harman's financial outlook," said Harman CEO Dinesh Paliwal in a news release.

"This settlement enables us to move forward in a decisive manner to implement our initiatives to ensure the long-term growth of the company and avoid the time, cost and distraction of litigation."

In addition, GS and KKR agreed not to sell or hedge their position in Harman for at least a year.

Also, Brian Carroll, member of KKR, will join Harman's board of directors.

"We are pleased to have reached an understanding with KKR and GSCP,' said Sidney Harman, executive chairman of Harman, in a statement.

"Although we do not agree with the reasons for cancellation of the original merger agreement, we view this $400 million investment as a vote of confidence in our business and its prospects for continued growth."

"Harman is a leader in audio and infotainment systems, and enjoys strong leadership in chairman Sidney Harman and CEO Dinesh Paliwal," said Henry Kravis, co-founding member of KKR, in a statement.

"The merger unfortunately could not be completed, but we are pleased to make this investment in the company. We believe this investment and our representation on the board is an outstanding way to support Harman and its management team in the future."

Harman, based in Washington, D.C., develops audio and infotainment products for the automotive, consumer and professional sectors.

Bear Stearns allies with Citic

Elsewhere, the Bear Stearns Cos. Inc. entered into an agreement to ally with Citic Securities Co., Ltd. in a deal that will entail jointly developing capital markets products and businesses in China.

The agreement includes $1 billion in cross-investments from each firm by the other, according to a joint statement released Monday by both firms.

"The strategic alliance between Bear Stearns and Citic Securities will include broad collaboration in the People's Republic of China," said the statement released Monday. "The companies will work together to develop new financial products and services to meet the evolving needs of the Chinese market."

The two will form a Hong Kong-based company that offers capital market services on a pan-Asian basis, the statement said. Each party will have a 50% share of the joint venture.

"The joint venture will provide a wide range of capital markets services, including cross-border mergers and acquisitions advisory, international equity and fixed-income capital markets with a particular focus on international offerings of Chinese companies, venture capital and private equity, asset management, and equity and fixed-income services," said the statement.

"The joint venture will serve as a conduit for international companies seeking access to Asian capital markets and for Chinese entrepreneurs, corporations and state-owned enterprises looking to access capital or invest outside of the region."

Under the agreement, Citic will acquire $1 billion of 40-year convertible trust preferred securities that will convert into 6% of Bear Stearns' shares.

"As a leading Wall Street investment bank with an 84-year history, we believe that Bear Stearns is the ideal firm for us to partner with based on its client-focused culture, sophisticated analytical systems and deep capital markets expertise," said Wang Dongming, Citic's chairman, in a statement.

"This groundbreaking alliance will give Bear Stearns a unique footprint in one of the world's fastest-growing economies through a strategic partnership with a premier market leader," said Jimmy Cayne, Bear Stearns' CEO, in the statement.

Bear Stearns's stock gained $1.44 to end at $117.85 (NYSE: BSC).

Magellan shareholder recommends dividend

Finally, Magellan Health Services, Inc. shareholder Shamrock Activist Value Fund has recommended a $12.00-per-share, one-time dividend.

"We believe that the board has the opportunity to dramatically improve shareholder value by taking immediate action to optimize the company's balance sheet," Shamrock said in letter to Magellan's board of directors Monday.

"The company's current forecast projects $12 million of debt and approximately $315 million of unrestricted cash at year-end. Moreover, management indicated on the July 27 conference call that it has access to approximately $1.25 to $1.5 billion of capital from cash on hand and available debt capacity. We agree with management's assessment.

"Clearly, Magellan has the financial flexibility to add reasonable leverage to its balance sheet, return a portion of its excess capital to shareholders, while retaining adequate liquidity to pursue opportunistic acquisitions. Therefore, we recommend that the board should authorize a one-time special dividend of $478 million or approximately $12.00 per share."

Shamrock owns 1,822,878 shares of Magellan, or 4.6% of the health care company's outstanding stock.

Shares of Magellan closed up by 79 cents, or 1.92%, at $41.96 (Nasdaq: MGLN).

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