Private equity, big losers. Samson Resources is a stricken American oil and gas explorer that has become infamous in the world of private equity and among the masters of the universe as one of the great black holes of recent years. Losses so far total all the US$7.2 billion in equity and debt that was paid over in 2011. That was just as the rapid expansion of the US shale gas industry (and then oil) was starting to emerge, as gas prices fall sharply, undermining companies like Samson. The slide in oil prices, which started a year ago this month, added to the growing financial disaster.
We won’t know the true extent of the losses until Samson goes belly-up, as it has been threatening to do since late last year. And who are the losers? Investors whose money is managed (expensively) by KKR, the top-tier private equity mob, Crestview Partners, a smaller pack of private equity clever clogs, National Gas Partners (an “energy investor”). Japanese trading house Itochu sold its 25% stake in Samson back to the company for US$1, recently, after writing off its US$1.04 billion in equity invested in the company. This recalls the old joke about how to start a small business — in this case, get private equity to buy a large one at the wrong time, load it up with debt (at a time of record low interest rates) and watch the whole thing blow up. It makes you wonder why the business and other media take private equity and hedge funds seriously; they are just an expensive (in terms of fees) way of under performing, like most other fund managers these days. — Glenn Dyer
But don’t forget the miners. Of course Rio Tinto is up there with the hedgies and private equity in terms of doing dodgy deals — who can forget the near-company-destroying takeover of Alcan of Canada for US$44 billion, just as the GFC was taking shape in 2007? A landmark deal for bad timing and overpaying. That cost Rio billions in write-offs, senior managers and other losses (reputation). Oh, and that reminds me of another dud deal involving Rio Tinto. It bought Mozambique coal miner Riversdale Mining for $3.9 billion, finally discovered there were problems with the coal quality, the mine and the transport system, and sold it for $50 million.
Riversdale was the straw that forced the CEO and CFO out of Rio, as well as changes on the board, triggering write-downs and deep cost-cutting. And there was departing Rio Tinto director Mike Fitzpatrick in the local media this morning sounding all grand and regal and moaning and groaning about the RBA (kept interest rates too high, too long, apparently), Glencore (how dare they try to buy us) and the way Australia didn’t save enough money from the mining boom. Part of that was due to the losses of close to US$30 billion announced by Rio from its Alcan and Riversdale adventures and other dud deals. Fitzpatrick admitted an error in the Alcan buy, but no apology, even though talk is cheap. — Glenn Dyer
Hey, here’s another dud deal. And last week another great mining industry disaster was finally exposed when Rio’s tormentor Glencore sold the Cosmos nickel mine for A$24.5 million. Glencore had inherited this one in the takeover of Xstrata (which has also been a value-destroyer for Glencore, given the collapse in coal and copper prices). Back in 2007 Xstrata paid A$3.1 billion for Jubilee Mines to get control of the company’s nickel mine — you guessed it, Cosmos. Xstrata bought Jubilee when nickel was over US$32,000 a tonne (it’s around US$20,000 a tonne cheaper these days). So that’s a loss of more than US$3 billion. Nice one. — Glenn Dyer
And, wait, here’s another … Oh, there are just so many dud deals among our miners — large and small in recent years. Overpaying for assets, over-investing in new and existing projects, and ignoring the possibility that prices can fall, seems to be in the genes of miners. Its been happening for decades, and they still don’t learn. And here’s another one from the US, which has blown up billions of dollars in value: back in 2013, US copper producer Freeport-McMoRan went all warm and oily and outlaid US$9 billion to buy two oil and gas companies, when oil prices were close to US$100 a barrel. Two years later and there’s a new realism.
Overnight, Freeport announced plans to sell shares in those companies. No sale figure has been given as the shares will be issued via an initial public offering. Freeport’s shares have fallen more than 40% in the past year, so that implies a US$3.6 billion loss on that oil and gas play. Shareholders pay the cost in a lower price and reduced dividends. And mining companies have had to hide the campaign against governments, taxes, industrial relations, the environment and global warming when they are the single largest threat to their own survival. In fact, Australian mining companies are just as talented as Australian media companies in blowing up value, destroying jobs and businesses and ruining shareholder returns — Fairfax Media, Seven West Media, Ten Network, James Packer and CVC in the old Nine Network and, of course, the biggest of them all, News Corp. — Glenn Dyer
How about doing the banking sector next. Incompetence and overpaying isn’t just confined to the miners.
Nice work.
If you can get it?