Blackstone, KKR, TPG to Pay "Club Deals' Settlement

By Dow Jones Business News, 
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In May, Stephen A. Schwarzman, chairman and chief executive of Blackstone Group LP, sent a pointed email to Lloyd Blankfein, his counterpart at Goldman Sachs Group Inc., saying he was disappointed that Goldman had agreed to settle a lawsuit alleging collusion to keep down prices of private-equity takeovers.

Blackstone, the world's biggest buyout firm by assets under management, also had been sued along with a number of competitors, and Mr. Schwarzman was unhappy that Goldman decided to settle the suit without discussing the move with Blackstone executives, according to people familiar with the email.

Moreover, Mr. Schwarzman told the Goldman CEO that the bank's move would make it more expensive for Blackstone and other buyout firms if they, too, decided to strike a deal, one of the people said. It isn't clear how Mr. Blankfein responded.

Mr. Schwarzman's concerns bore out when Blackstone, along with KKR & Co. and TPG, agreed to pay a combined $325 million to settle the litigation without admitting wrongdoing, according to court papers filed in U.S. District Court in Boston on Thursday. Each company's share of the settlement wasn't disclosed. Goldman agreed to pay $67 million without admitting wrongdoing, according to a June 11 court filing.

Plaintiffs' lawyers often "give discounts to earlier settlers as an encouragement to step forward," said Tom Bush, who is co-chairman of the antitrust practice at law firm Edwards Wildman Palmer LLP, which isn't involved in the case. "You slowly ratchet up the pressure on the guys that are left standing."

Lawyers brought the case in December 2007 on behalf of investors in companies sold to a number of private-equity firms during the run-up to the financial crisis.

The lawsuit cites 27 transactions and alleges that the buyout firms, which before the financial crisis often teamed up to acquire multibillion-dollar companies in what are known as club deals, had agreements to not compete with one another on certain takeovers, thus driving down prices paid to shareholders.

In the 2006 buyout of Freescale Semiconductor Inc., Blackstone President Hamilton "Tony" James said in an email that KKR co-founder Henry Kravis called him with congratulations and to inform him that KKR was "standing down" from competing for the deal "because he had told me before they would not jump a signed deal of ours," according to the lawsuit. Jumping a bid means trying to trump the offer in an agreed-upon buyout deal.

Messrs. James and Kravis declined to comment through representatives.

Mr. Schwarzman's message to Mr. Blankfein shows how tempers can flare when Wall Street firms' interests diverge. For Goldman, Mr. Schwarzman's displeasure is particularly tricky. In addition to pursuing its own private-equity investments, Goldman advises Blackstone and other private-equity firms on corporate takeovers, a lucrative business that can deliver big fees. Goldman also helps buyout firms sell shares in the companies they own.

Along with Goldman, Bain Capital LLC in June agreed to settle for $54 million. Thursday's agreement by Blackstone, KKR and TPG brings the case's settlement tally to $475.5 million.

Carlyle Group LP is the lone defendant now in the nearly seven-year-old lawsuit, which is set to go to trial in November. "These claims are without merit, and we will continue to vigorously contest the allegations," a Carlyle spokesman said.

Many of the firms have decided to settle the litigation in part to avoid the risk of a large judgment should they lose at trial and, more immediately, to put an end to expensive wrangling with lawyers over producing documents and giving depositions. Other private-equity firms were earlier dropped as defendants by the judge.

On Thursday, KKR said the allegations are spurious, but the firm determined it was "best for KKR and our limited partners to put an end to the distraction and expense of this litigation." The firm in a regulatory filing Thursday said the settlement isn't expected to "have a material effect on KKR's financial results."

Blackstone, KKR and TPG have certain rights to back out of the settlement deals, which are set to be considered at a Sept. 4 court hearing. A judge must later this year give the case's plaintiff shareholders class-action status for the settlement to remain valid.

Carlyle believes the judge could decide against giving the plaintiffs that status, according to a person familiar with the firm's thinking. The Washington-based private-equity firm also is set to argue for the case's dismissal at an October hearing.

Thursday's settlement agreement moves the litigation closer to resolution after years of depositions, hearings and production of documents. Along the way, emails embarrassing to top private-equity executives emerged.

According to the lawsuit, Blackstone's Mr. James told KKR co-founder George Roberts in an email: "We would much rather work with you guys than against you. Together we can be unstoppable but in opposition we can cost each other a lot of money."

In an email referring to the Freescale deal, according to court papers, Mr. Kravis wrote that Messrs. James and Schwarzman were "very happy campers that we are not going any further, since they now have a signed agreement. We got lucky!!!! They told me that they are working on a large one, which they say is "right up our alley" and they will be happy to have us work with them. We will see!!!" Messrs. Roberts and Schwarzman declined to comment.

That large deal was Clear Channel Communications Inc., eventually purchased in July 2008 by Bain and Thomas H. Lee Partners LP. A judge dropped Thomas H. Lee Partners from the lawsuit last year.

Gillian Tan and Liz Hoffman contributed to this article.

Write to Mike Spector at mike.spector@wsj.com and Gillian Tan at gillian.tan@wsj.com

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