Don’t count out private equity yet

Like any other cyclical industry, the prospects for private equity look ugly as we continue into a big downturn in leveraged buyouts. Pending deals are being called off left and right and new deals are few and far between. But just like Billy Ray Cyrus found his way back into America’s achy breaky heart, don’t be surprised if private equity doesn’t fade into the night.

A recent Forbes article dove into the current state of affairs in the private equity industry and concluded that amidst the turmoil is opportunity — albeit for the best and brightest in the field. As the public debt and equity markets continue to shake out, those who were swimming naked (as the Warren Buffet quote goes) are increasingly being outed. And the easy access to investor capital and debt during the buyout boom ensured that there is no shortage of swimmers donning their birthday suits right now.

However, for the major players in the industry — the Blackstones, Carlyles, and KKRs of the world — cyclical swings in the world of buyouts is nothing new. Far from scrambling, these firms are plotting the ways that they can now shift gears to profit from the current panic. One way they’ve done this is buying back the very debt that they used to buy companies during the boom.

Of course the suspected silver lining for the PE shops may be hard to swallow given the lousy current results. Blackstone, which made its IPO last year with much fanfare, reported a hefty loss for the first quarter. The Wall Street Journal noted that Blackstone’s CEO Steven Schwarzman was looking at a claw in the first quarter that wasn’t from one of his notorious stone crabs. And the Blackstone bears in The Motley Fool’s CAPS community have kept the stock stalled at two out of a possible five stars.

Many investors may be familiar with Blackstone largely because of its recent public offering. The firm, though, like Carlyle and KKR, has been with us and doing buyout deals for decades and — in this writer’s opinion at least — will be with us for decades more. While Blackstone may be the most obvious public market play on private equity, business development companies Apollo Investment and American Capital Strategies can give public market investors similar exposure.

Want to see what other investors had to say about Blackstone? Head over the CAPS, where over 100,000 investors are sharing their thoughts about thousands of stocks.

Start using the MSN CAPS stock-picking system and you could win $15,000.  To learn more, read this.

The author owns shares of Blackstone Group. The Motley Fool has a disclosure policy.
 

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$9 to rent an HD movie on demand?

People will pay between $7 and $9 to rent HD movies-on-demand that come out the same day as DVDs, according to consulting firm Oliver Wyman. Right now, movies generally hit DVD first before releasing on-demand. Changing that formula would lead consumers to pay for three more movies a year, the firm said, adding $5 billion to the $50 billion spent on movies annually in the U.S.

Even a $7 rental seems too pricey to me, unless you’re talking about some jaw-droppingly amazing movie that absolutely must be watched in high-definition. Despite its slightly outrageous numbers, the report touches on a fact that movie studios have clued into for a while now: video-on-demand is smoking hot, and doesn’t deserve its second-tier status.

Time Warner figured that out, and this year is putting all its films on video-on-demand the same day they come out on DVD. The margins from on-demand movies hits 60% to 70%, execs said, compared with 20% to 30% for DVD rentals. “It’s very good for the film companies,” CEO Jeff Bewkes said during the company’s Q1 earnings call.

Comcast’s video-on-demand offerings used to be as pathetic as the 99-cent VHS bin at the video store. But its library now stands at 10,000 titles, with an increasing number of movies available the same day as the DVD release. The service gets about 250 million views a month.

So where are the VOD investment opportunities? The list of companies making plays in this business is long, and includes telecom carriers, cable companies and equipment vendors. Motorola and Cisco are deeply invested in the equipment piece of the puzzle. The six largest cable operators have joined forces to make it easier to advertise through VOD. Netflix, Amazon, Blockbuster, TiVo and Apple have introduced or are developing on-demand services.

A third of U.S. homes can access on-demand video, and analysts are making big-money projections for the future of the business. The global VOD market will hit $11.4 billion by 2011, according to the Informa research firm. And though North America will have 27% of the total subscribers, it will contribute 46% of the overall revenue.

 

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RIMM ‘Thunder’ to Lose Keyboard, But iPhone Still the Touch-Screen Boss

With a chance to make it good somehowHey what else can we do now? Research In Motion is planning to take “Thunder Road” in its battle with Apple for the hearts and thumbs of smartphone users. …

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Being Carl Icahn: If It Were Easy, We’d All Be Billionaires

A couple of questions about Carl Icahn’s efforts to amass shares in Yahoo have been nagging at me:Why does Icahn need FTC approval to buy more YHOO shares? If Icahn’s YHOO stake is mostly via options vs. common stock, as

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Will Zappos Ever Go Public?

So, Zappos has a lot to be proud of. It survived the dot com crash. It’s topping $1 billion in annual sales. And it has a posse so loyal it’ll drop everything to come party on an hour’s notice. But will the long-in-the-tooth Web company ever go public?To

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How Zappos Survived Nuclear Winter

So why didn’t Zappos die with so many other 1999-born companies? Partially they were unlucky– they couldn’t raise too much money before things crashed so they never got used to living on it. And partially they were lucky– a
focus on customer service ke

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Apple’s iPhone Market Opportunity Soars Near 650 Million Subscribers

From Silicon Alley Insider, May 16, 2008: Distribution deals for Apple’s (AAPL) iPhone keep flying across the wires. The latest:

Gamestop: Signs of slowing demand

After the recent merger with EB Games, GameStop is by far the No. 1 specialty retailer that focuses on the new and used video game market. The company has a total of 4,400 active stores in virtually every state and in 15 countries.
Gamestop
Revenue has been on the rise as the hot gaming market continues to grow exponentially. The latest editions of Rock Band, Guitar Hero, Halo 3 and the blockbuster Grand Theft Auto IV are all extraordinarily popular on every gaming platform.

But how will Gamestop continue to thrive in the face of significant competition from discount retailers such as Target and Wal-Mart? What’s more, the bulk-retailers are also selling video games in a time when many shoppers are looking for alternatives to save money as the economy softens. As it has shown to be a significant money maker, more retailers are looking to sell as a means to attract shoppers and to profit from the excellent margins.


Sales and EPS growth has been nothing but spectacular as video gaming has reach all-time popularity with players. Online, offline or any-line, the draw of the interactivity and the superb graphics along with compelling storyline has created a booming industry.  But, perhaps it is time to consider taking some profits or even looking to sell short the name in light of some very real competitive concerns.


Intuitively, as consumer sentiment wanes (now down to a 28-year low of $59) alternative shopping patterns will emerge. This means that the traditional shopping mall should see a significant decline in traffic and corresponding traffic to the bulk retailers will increase. This can be seen by the recent sales results of Costco, BJ’s and Wal-Mart as compared to Radio Shack, Sears and the now bankrupt Sharper Image.

In January, shares traded at $62 and have been on a wild ride of their own, then dipping as much as 50% into March. Since the low on March 3rd, shares have been rising with the markets and the anticipation of the latest game releases, moving it up towards $55.

With that backdrop and the reality that there is limited magic in the developmental pipeline, it is looking like it may be time to consider some taking profits or entering a short position on this name. Remember, it is still a retail operation and one that could be consider highly discretionary. Gamers are smart, they will trade, borrow or purchase used games from friends, trading store or even auction sites if money is tight.


On May 16th, Barron’s reported on the NPD Research release:



  • Activision’s (ATVI) sell through was down 11.5% in the month

  • Electronic Arts (ERTS) had a 74.4% increase in sell through to $65.8 million, but below the 160% gain forecast.

  • THQ (THQI) sell through was up 10.6% to $14.7 million again below the NPD gain of 65%.

  • Take-Two (TTWO) had a 919.4% increase in sell through to $199.6 million, thanks to the debut late in the month of Grand Theft Auto IV, although NPD analysts had expected 1,280% growth.

Perhaps the slowing sales is a foreshadowing of what is to come for Gamestop and the recent downward bias since mid-April is giving investors some advanced warning. This is a significant change of opinion, since as of May 2007 we were bullish on the stock as growth and fundamentals were strong. Now, we are nipping at the short side starting at $54 and will set up a top-end stop at $56. Overall, if the economy continues to struggle, this name could see a downside move towards $48 rather quickly.


Additional reading:


No Stopping Gamestop


How much for video gaming’s bad boy?


Nintendo’s Wii a surprise hit with seniors


Disclosure: Horowitz & Company clients may hold SHORT positions in securities mentioned as of the publish date. 

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