The Carlyle Group: Snakes in Paradias

Snakes in Paradise

THE CARLYLE GROUP

~ o ~

December 1, 2008

Hawaiian Telcom files for bankruptcy

Phone company says day-to-day operations will not be interrupted

BY RICK DAYSOG, Advertiser Staff Writer

Hawaiian Telcom filed for voluntary bankruptcy protection early this morning after it was unable to reach an 11th-hour deal with its creditors.

The state's largest telephone company filed for Chapter 11 reorganization in U.S. Bankruptcy Court in Delaware to shield its assets from bondholders, who could have demanded hundreds of millions of dollars from the company.

The 1,400-employee company said its day-to-day operations will not be interrupted by the filing. The local phone company has about 524,000 residential and business customers.

"Our decision to restructure through a Chapter 11 filing allows the company to reduce its level of debt and reorganize its business, so we can emerge a stronger and more financially secure company, better able to compete in the ever-changing communications industry," said company CEO Eric Yeaman.

"I strongly believe that the filing provides the right course of action to support what is in the best interests of our customers, employees, suppliers and other valued constituents."

Hawaiian Telcom has about $1 billion in debt, which includes $574.5 million in bank loans and about $500 million in bonds. The debt helped finance Washington, D.C.-based The Carlyle Group's $1.6 billion takeover of the local phone company in 2005.

Last month, the company warned customers and creditors that it might have to file for bankruptcy protection after it postponed a $26 million interest payment due to bondholders.

It instead opted for a 30-day grace period to give itself time to negotiate with creditors to restructure the debt.

Had it not filed for bankruptcy protection, bondholders could have asked for their money back because of last month's missed payment.

By reducing the debt, the company could shave off millions of dollars a year in interest payments and will provide the company's new management team breathing room to offer more competitive products.

approval necessary

Any restructuring plan will require the approval of the bankruptcy court and the state Public Utilities Commission, which has regulatory oversight over the company.

State Consumer Advocate Catherine Awakuni said last night that her office is monitoring the situation and that the company has kept her informed of the events surrounding the bankruptcy filing. Last month, Gov. Linda Lingle said her administration, the state Public Utilities Commission and the consumer advocate were closely monitoring the situation.

The bankruptcy is the first by a major local utility and would be the state's largest since Hawaiian Airlines' Chapter 11 reorganization in 2003. Hawaiian Airlines at the time had more than 3,400 employees and annual sales of more than $600 million. It successfully emerged from bankruptcy in 2005.

fewer customers

Founded in 1883, Hawaiian Telcom has about 1,400 workers and annual operating revenues of about $500 million.

As of Sept. 30, the company had 298,527 residential customers, down 11.8 percent from the year-earlier period.

The bankruptcy comes as Hawaiian Telcom installed a new management team earlier this year to revitalize the company, which has been losing business to wireless and other competitors. The team includes CEO Yeaman, formerly with Hawaiian Electric Co., and longtime First Hawaiian Bank CEO Walter Dods, as Hawaiian Telcom's chairman. The company also has hired Wall Street investment banking firm Lazard Freres to work with its creditors.

For Hawaiian Telcom, the debt load has been a huge problem since the 2005 takeover by Carlyle. For the first nine months this year, the company paid about $68.1 million in interest payment on the bonds and bank loans, according to company filings with the Securities and Exchange Commission.

The interest rate on the bonds by themselves range between 9.75 percent and 12.5 percent a year.

To be sure, the bankruptcy is more bad news for the company, which has lost more than $200 million since the 2005 takeover.

The local phone company also is losing customers because of the heated competition from wireless companies and other providers.

When Carlyle took over the local telephone company in 2005, it had more than 645,000 access lines. Today, it has about 524,000 residential and business lines.

Hawaiian Telcom files for bankruptcy | HonoluluAdvertiser.com

March 28, 2008

Carlyle Group faces Hawaiian Telcom heat

By admin, FierceTelecom

Fourth quarter 2007 financial results for Hawaiian Telcom, one of the oldest ILECs in the U.S., are scheduled to be reported on Monday, but The Wall Street Journal is reporting today that the owning the company has turned out to be a tremendous challenge for private equity firm Carlyle Group. Carlyle acquired the telco in 2005 for $1.6 billion from Verizon Communications, but mounting customer service and back office problems led to increased spending to fix the problems, lay-offs and a CEO switch.

When a PE-acquired company stumbles after a deal, the inclination is to blame the greedy buyer who probably knows nothing about telecom anyway, but that lets the experienced telecom managers in the acquired company off the hook too easily. Strangely, employees and customers sometimes end up pining for the former owner, which in most cases was a larger, more experienced telecom company. But to do so is to forget who sold them out and why.

The new CEO brought in by Carlyle, a company with other well-documented financial troubles of its own, is short on telecom experience but long on turnaround experience. If you worked for, or were being served by a telecom company in financial trouble, which kind of experience would earn more of your faith?

Source URL:

http://www.fiercetelecom.com/story/carlyle-group-faces-hawaiian-telcom-heat/2008-03-28

February 9, 2008

HawTel chiefs ring up big pay

By Jennifer Sudick, Honolulu Star-Bulletin

jsudick@starbulletin.com

Hawaiian Telcom's new upper management team comes with a price tag more than six times that of former CEO Michael Ruley, who was abruptly fired Monday in favor of a turnaround expert brought in by Washington, D.C.-based owner Carlyle Group.

The hiring of Stephen Cooper, chairman of Kroll Zolfo Cooper, a New York restructuring advisory and interim management company, as well as Kevin Nystrom, a senior director at the firm, as the company's chief operating officer, will cost Hawaiian Telcom a base fee of $600,000 a month -- plus bonuses based on improvements in the company's earnings. The chief operating officer position was created for Nystrom.

Ruley's compensation totaled $1.14 million in 2006, according to the company's latest annual filing.

The new executives' base pay, which amounts to $7.2 million a year, is what the company "feels is appropriate based on the experience that both Cooper and Nystrom have had over the years," spokesman Joel Matsunaga said.

Cooper, who replaced Kenneth Lay in 2002 as interim head of since-dissolved Enron Corp., has led a number of restructuring projects, including the bankruptcy of American Home Mortgage last year. Nystrom has served as director of restructuring of American Home Mortgage since August.

The fee, disclosed yesterday in a filing with the U.S. Securities and Exchange Commission, also covers any additional associate directors the new team might hire. Matsunaga declined to say how many that would be.

http://starbulletin.com/2008/02/09/news/story01.html

May 22, 2004

Isle ties vital to
Verizon buyer

Local investors join a D.C.-based
firm in the $1.65 billion phone
company deal

By Dave Segal, Star-Bulletin

The private-equity Carlyle Group, which announced yesterday it was buying Verizon Hawaii for $1.65 billion, said it wants to return the telephone company to its local roots.

And to prove its commitment, the Washington, D.C.-based company has brought in BancWest Chairman and Chief Executive Walter Dods to lead a group of local investors.

"A big part of our plan is to return Verizon Hawaii to its roots as a local phone company, empowering local management," said William Kennard, Carlyle's managing director and a former Federal Communications Commission chairman. "It's sort of a version of 'Back to the Future,' if you will."

Dods, who will be retiring as chairman and CEO of First Hawaiian Bank and parent BancWest at the end of this year, stressed that his investment is personal and has nothing to do with the bank.

"I'm a strong believer in community involvement, and I've talked to the Carlyle Group (and Kennard) and he strongly agrees with the idea of bringing local community involvement back to Hawaii," Dods said. "I've signed up a group of local investors to be part of the transaction."

Dods declined to divulge any of their names.

But Kennard said the group of local business people Dods assembled represents a cross section of business, banking, various retail operations, real estate and hospitality.

"The notion here is that we're just not paying lip service to the desire to reconnect to the local community," Kennard said. "We want local business leaders investing alongside of us."

The Carlyle Group, which has more than $19 billion under management, already has a presence in Hawaii through Horizon Lines LLC, which it purchased from CSX Corp. for $300 million last year. Horizon is the second-biggest ocean shipping operator in the state behind Matson Navigation Co.

"We think that this is a great market, and we're excited about the prospect of investing more money here," Kennard said.

Kennard wouldn't break down the cash and debt structure of the deal with parent company Verizon Communications Inc., but a source familiar with the situation said that each local investor is putting in at least $1 million.

Kennard said the Carlyle Group is still evaluating the current management team and isn't ready yet to make any decisions. Verizon Hawaii is headed by Melvin Horikami, who took over as president for the retired Warren Haruki in September. Kennard wouldn't say whether Haruki was involved with the Carlyle purchase, but other sources said Haruki will play a role.

Kennard said all of Verizon Hawaii's employees will retain their jobs, and there eventually will be an increase in the work force as Carlyle brings back to Hawaii jobs that had been handled on the mainland by Verizon's parent.

Kennard said the former GTE Hawaiian Tel, which was renamed Verizon Hawaii in 2000 when GTE Corp. merged with Bell Atlantic, also will get a new name.

"We don't have a name we can disclose right now, but I can assure you it will be a name that conveys the local character of the company," Kennard said.

The transaction, which Kennard said had been eight months in the making, needs approval from the state Public Utilities Commission, the FCC and the U.S. Department of Justice. He said he was optimistic that Carlyle could receive PUC approval by the end of this year and that the deal could close early in the first quarter. Kennard said he hopes to file an application with the PUC within a month.

Kris Nakagawa, chief legal counsel for the PUC, said complex cases such as the Carlyle-Verizon Hawaii deal normally take six months to a year for the three-member commission to render a decision. He said there was no way now to offer a precise timetable since there are certain statutes and rules that Carlyle must follow. Nakagawa also said objections from other parties could extend the decision-making process.

The Carlyle Group said the deal includes Verizon Hawaii's local telephone operations, print directory, long-distance operations and Internet service provider business.

Verizon Wireless operations and assets in Hawaii are not included in the transaction. Verizon also will retain two units in the state that provide services for federal government customers: Verizon Federal Network Systems and Verizon Federal Inc.

Verizon Hawaii, which has about 1,700 employees, had sales last year of $610 million, operating income of $58 million and depreciation expense of $111 million. The company has 707,000 local phone lines.

"We will offer new services to our customers, including expanded broadband, and we expect to add many new jobs after the acquisition," Kennard said. "Importantly, rates will stay the same as we reposition the business as a true local company."...

Carlyle Group

The global investment firm buys companies around the world, with a concentration in communications.

Offices: Headquarters in Washington, D.C., 23 offices in 14 countries

Assets: $19 billion under management

Portfolio companies: More than 150,000 employees and $31 million in revenues

Hawaii presence: Purchased shipper Horizon Lines LLC from CSX Corp. for $300 million last year.

Managing director: Former Federal Communications Commission Chairman William Kennard

Prominent advisers: Former President George H.W. Bush; former British Prime Minister John Major; former U.S. Secretary of State James A. Baker, III; former U.S. Secretary of Defense Frank C. Carlucci; former U.S. Speaker of the House and Ambassador to Japan Thomas S. Foley

Web site: www.carlyle.com

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July 6, 2003

United Defense armed for success

The Courier-Journal

United Defense Industries has been making landing craft and armored vehicles since World War II. The company’s arsenal includes combat vehicles (Bradley armored infantry vehicles), fire support equipment (self-propelled howitzers), combat support vehicles, weapons delivery systems (missile launchers) and amphibious assault vehicles.

The U.S. government [a.k.a. US taxpayers] accounts for almost 80 percent of sales. [I wonder who accounts for the other 20 percent?]

United Defense Industries also has acquired U.S. Marine Repair, a leading non-nuclear ship repair and overhaul company. The Carlyle Group owns 49.5 percent of United Defense, whose directors include such former government heavy-weights as Frank Carlucci (ex-secretary of defense) and Gen. John M. Shalikashvili (former chairman of the Joint Chiefs of Staff).

In Louisville, United Defense makes naval guns at the Greater Louisville Technology Park, formerly the Naval Ordnance Station.

Source: Hoover’s Inc (www.hoovers.com)

[The chart accompanying this article shows revenues for the Quarter ended March 31, 2003, to be $466.5 million vs. $356.4 million for the Quarter ended March 31, 2002. Net income for the respective quarters were $38.4 million vs. $19 million. Earnings per share were 73 cents vs. 36 cents. Stock prices on July 5, 2002 were $21.95 vs. $26.89 on July 3, 2003. Who says nobody wins in a war.]

December 17, 2002

Group takes majority stake
in CSX Lines

Reuters

WASHINGTON - CSX Corp., the largest eastern U.S. rail operator, on Tuesday sold a majority stake in its ocean transport unit to The Carlyle Group for $300 million in cash and securities as part of its plan to focus the company on its core railroad operations.

Terms of the transaction call for a venture led by Carlyle, one of the largest U.S. private investment funds, to pay $240 million in cash and issue $60 million in securities to CSX in exchange for CSX Lines, its domestic container-shipping business....

With 17 U.S. flag vessels and 22,000 containers, CSX Lines ranks as the largest U.S. ocean transport company, providing transportation services to and from the continental United States, Alaska, Hawaii, Guam and Puerto Rico.

For more, GO TO > > > Nests on the Rails

THE MARISCO AFFAIR

February 14, 2002

Marisco sued over Kalaeloa drydock

The dock was intended for native Alaskan use, competitor
Pacific Shipyards contends

By Russ Lynch, Honolulu Star-Bulletin

A Hawaii shipyard business has sued a local competitor and a native-Alaskan tribal business for what it says is a racketeering scheme to take over a surplus Navy floating drydock intended for use in Alaska.

The dock was intended to be used for the economic benefit of natives at St. Paul Island, Alaska, and instead has been put to work in competition with private enterprise in Hawaii, according to complainant Pacific Shipyards International.

The consortium of two Hawaii-owned local shipyards filed a federal racketeering and corrupt practices complaint yesterday against Alaskan Aleut business Tanadgusix Corp. and rival Oahu ship-repair business Marisco Ltd.

The lawsuit says Marisco is using the surplus drydock, donated by the Navy to Tanadgusix, for ship repair work at Kalaeloa, formerly the Barbers Point Harbor, when the conditions of the Navy's gift exclude its use outside Alaska.

Meanwhile, Pacific Shipyards invested about $4.5 million to bring a new floating drydock to Hawaii and is getting unfair and illegal competition from Marisco's use of the donated equipment, the lawsuit says.

Marisco did not return calls and the Alaska business could not be reached yesterday, but the lawsuit says they tried repeatedly to get permission to keep their equipment in Hawaii and were denied by the U.S. General Services Administration.

The lawsuit cites GSA letters saying the drydock was for use in Alaska only, for the benefit of the natives at St. Paul Island, Alaska, near Anchorage.

The drydock, which is sunk under vessels and then floated until the ship to be repaired is dry, was worth more than $5 million according to federal documents filed with the lawsuit.

Then Tanadgusix, normally known as TDX, wrote to the government saying moving the equipment to Alaska wasn't financially feasible, it couldn't economically be used "anywhere but where it presently resides in Hawaii" and that allowing it to be used in Hawaii would immediately begin to benefit the Alaskan natives.

The GSA replied use outside Alaska would be illegal....

... Continued at United States Marine Repair.

< < < FLASHBACK < < <

THE ALASKA / HAWAII...TED STEVENS / DAN INOUYE...CONNECTIONS

December 17, 2000

In Congress, sharing of leadership unwise idea

By Jerry Burris, Advertiser Editorial Section Editor

You will soon be hearing and reading a lot about "bipartisanship" and "power-sharing" and even "co-leadership" in the coming weeks as the new Congress gears up in Washington.

The U.S. House is almost evenly divided and the Senate is split precisely, with 50 Democrats and 50 Republicans. . . .

All this leads some to suggest that the Senate, particularly, should carve up power equally among Democrats and Republicans.

But the word from Hawai‘i Sen. Dan Inouye, surely about a canny a student of Senate politics as there is, is this:

Don’t count on it.

"We’re not going to have co-chairmen," he says. "No way.”

"I don’t believe in a co-chair."

It is simply in the nature of the political process, Inouye said, that at the end of the day someone has to be in charge. That means a single chair of the committee with votes sufficient to make a binding decision.

This doesn’t mean there’s no room for collegiality, Inouye said, or a fair sharing of the work and responsibility.

He practices what he preaches on the Senate Appropriations Committee, where he has shared power and influence for years with Alaska Sen. Ted Stevens.

Inouye and Republican Stevens work closely together.

Although the Republicans currently are in charge, Stevens frequently turns the gavel and responsibility on the Appropriations Defense Subcommittee over to Inouye.

In previous years, when the Democrats had the upper hand, Inouye would do the same for Stevens....

April 9, 2002

Pork list shows rise
from 2001 spending

By Stephen Dinan, The Washington Times

A youth-outreach program in Missouri expected to spend $273,000 to combat "Goth culture" was among the $20.1 billion that Congress doled out for pet projects in fiscal year 2002, according to the "Pig Book" released today.

The "Pig Book," the annual report on pork projects from Citizens Against Government Waste, calculates the number and dollar total of earmarked projects from parking garages to grants to universities.

The 8,341 "earmarked" projects are 32 percent more than last year's 6,333, and the $20.1 billion appropriated represents an increase of 9 percent over 2001. . . .

Earmarks are projects that Congress says must be funded; the rest of the appropriations are left up to executive departments and agencies to spend. The Bush administration has been critical of earmarks, arguing that they take away agencies' discretion to spend money properly.

The book's authors say specific earmarks are hurting the nation's ability to fight the war on terrorism.

"Here is a simple math equation that doesn't need federal funds: in fiscal 2001 there was $18.5 billion in pork-barrel spending and Pentagon officials predict an $18 billion shortfall in the defense budget to fight the war on terrorism," the report says.

But John Scofield, spokesman for Republicans on the House Appropriations Committee, said they have made a conscious effort to avoid earmarking counterterrorism funds. He also said earmarks aren't a real problem overall....

The kings of pork are in the Senate, and it's a bipartisan group, the report says.

The three top states in terms of earmarks-per-capita are Alaska, Hawaii and West Virginia —— and Sens. Robert C. Byrd, West Virginia Democrat; Ted Stevens, Alaska Republican; and Daniel K. Inouye, Hawaii Democrat, all sit on the Senate Appropriations Committee....

Continued at: United States Marine Repair

November 30, 2001

The Carlyle Group Is A Key Player
in Media Consolidation

- With the Help of Colin Powell's Son

Frank Washington……heads a new company these days called Moon Shot Communications. And his new goal is to make a lot of money in the next several years by buying TV stations across the country, waiting for their value to increase, and then selling them to the highest bidders.

Washington believes the stations will command higher prices if the Federal Communications Commission [under Colin Powell's son Michael] loosens rules limiting the number of broadcast TV stations a media company can own in the same market -- a change he expects to happen over the next few years. The change would uncork a consolidation-driven buying frenzy like the one that began in radio 10 years ago. By buying now and selling later, Moon Shot would try to pocket some fat capital gains.

Washington and four partners are working with investors and the Carlyle Group of Washington, D.C., a major private-equity firm, to line up stations they might buy.

Posted on the Internet:

An article from Newsday, Jan 31, 1995, by Karen Rothmyer, "Peso Hits Record Low As Bailout Is Debated," identifies some of the Council on Foreign Relations members involved in the cover-up.

They were "Former Presidents George Bush, Jimmy Carter and Gerald Ford [who] signed a declaration of support for the [bailout] plan. Also endorsing the plan was George Soros, probably the world's most influential international investor."

George Soros is also a member of the Carlyle Group. The Carlyle Group is an investor team led by Ronald Reagan's Defense Secretary Frank C. Carlucci III and funded in part by the Mellon family.

Carlucci is a sawed off runt with a Napoleon complex and a poor self image. The furniture in Carlucci's office is miniaturized so he feels bigger. When Carlucci is photographed with other men, they sit down, and he stands up, to give the perception he is bigger. As president and CEO of Sears World Trade Center, Carlucci left the company with a $60 million dollar loss, and went work for the government.

The managing director of the Carlyle Group is George Bush's White House Office of Management and Budget Director Richard Darman.

A partner in the group is George Bush's Secretary of State James A. Baker III.

Another member of the Carlyle group is Richard Nixon's White House Office of Management and Budget Deputy Director Frederic Malek.

George Bush Sr.'s son George Bush Jr., former CIA Director Robert Gates and current SEC Chairman Arthur Levitt are advisors to, investors in or board members of Carlyle's companies. Included in Carlyle's press kit are Vernon Jordan and Bob Strauss.

Carlucci, Darman, Gates, Jordan, Malek and Strauss are Council on Foreign Relations members.

The Carlyle group has exploited their governmental connections and ties to turn itself into one of the twenty-five largest defense contractors in the world.

All the members of the Carlyle group have been part of dubious investment activities.

Many have been exposed in scandals that involve the Central Intelligence Agency....

October 21, 1999

TOP POLITICIANS LINKED TO
PENSION FUND DEALS

The Hartford Courant

Connecticut State Treasurer Denise L. Nappier shone the light Wednesday on seldom-seen machinations that have put millions into the pockets of well-connected “finders” in state pension investment deals — and some of the state’s best-known politicians were caught in the glare.

Nappier, responding to the scandal surrounding her now-disgraced predecessor, Paul J. Silvester, released a list of those who have received finder’s fees and other compensation in treasurer’s office deals since 1991....

One firm that has given Nappier an incomplete response is the Carlyle Group — which has figured prominently in the Silvester scandal....

Silvester invested $50 million in pension funds with Carlyle, which has been a client of Wayne Berman, a Washington-based consultant and major fund-raiser for Texas Gov. George W. Bush’s presidential campaign....

Berman gave Silvester a job with his new business consulting firm, Park Strategies, after his term ended....

For more, GO TO > > > A Connecticut Yankee in King Kamehameha’s Court

April 23, 2001

Money Watch
By Vishesh Kumar

CityNet Telecommunications has
a dirty little secret

...but it still manages to walk away with $275 million in funding.

CityNet Telecommunications

CEO: Robert G. Berger
Location: Silver Spring, Md.
Funding: $275 million in equity and debt, following a $100 million investment in April 2000
The Pitch: Stringing optic cables inside sewer lines to bring broadband access to buildings

Don't laugh when you hear CityNet Telecommunications' dirty little secret: The company brings fiber-optic networks to office buildings by laying lines in sewers.

CityNet has outfitted robots with digital cameras and sent them into wastewater systems. The robots install stainless steel tubes containing fiber lines along the walls of sewer pipes. Initially developed by a Swiss firm to clean sewers, the robots go through tunnels as narrow as eight inches across.

The stingy private-equity market has opened the floodgates for CityNet. The company raised $175 million in equity and $100 million in debt financing last week, one of the largest private rounds of investment for any company this year.

The Carlyle Group, a buyout and private investment firm, led the charge, which also included Berkshire Partners, CIBC Capital Partners, Crescendo Ventures and Trimaran Capital Partners....

CityNet went to the Carlyle Group to lead the round because of the firm's global reach and track record in telecommunications. Carlyle has also invested in Global Crossing, Nextel and Nortel.

"In addition to being able to write a big check," says Rosenblum, "the fact that we have strong industry focus and operations in Europe and elsewhere will be a big help."

February 14, 2002

Marisco sued over Kalaeloa drydock

The dock was intended for native Alaskan use,
competitor Pacific Shipyards contends

By Russ Lynch, Honolulu Star-Bulletin

The lawsuit cites GSA letters saying the drydock was for use in Alaska only, for the benefit of the natives at St. Paul Island, Alaska, near Anchorage.

In their initial pitch to the state of Alaska and the federal government, the Alaskans said the drydock, called Ex Competent but officially AFDM-6, would be repaired at Marisco and towed to St. Paul Island. The drydock, which is sunk under vessels and then floated until the ship to be repaired is dry, was worth more than $5 million according to federal documents filed with the lawsuit.

The GSA replied use outside Alaska would be illegal. . . .

Pacific Shipyards said in the lawsuit that in mid-January, Marisco began using the Alaskan drydock at Kalaeloa to service the Coast Guard cutter Jarvis.

That was in direct violation of the terms of the Alaskans' acquisition of the drydock, the lawsuit says.

Pacific Shipyards, which brought its new floating drydock to Honolulu's Pier 41 a year ago, is a combination of Honolulu Shipyard Inc. and Honolulu Marine Inc., which joined forces in a new limited liability corporation in May 2000. They are descendants of Dillingham Shipyard, Pacific Marine and other businesses that have been in Hawaii ship repairing for more than 50 years.

William Clifford, managing partner of Pacific Shipyards, said that "what Marisco and TDX have done is wrong" and the donation of the surplus Navy equipment from Pearl Harbor was intended to promote economic development, employment and job training in Alaska.

"However, almost as soon as TDX got the drydock, TDX started taking steps to put the drydock into operation here in the state of Hawaii. The General Services Administration of the United States Government has told TDX in writing they cannot use the drydock in Hawaii. TDX is using it anyway," Clifford said.

May 29, 2002

United Defense deal may
save Carlyle investment

By Mark Weinraub

NEW YORK (Reuters) - A plan by United Defense Industries Inc. to buy Carlyle Group shipyard unit United States Marine Repair may save the huge investment Carlyle has in the army contractor, which has been reeling from a Pentagon decision to scrap an $11 billion artillery contract.

The deal, which expands United Defense's (UDI) product base, provides the company with cover should its traditional operations show weakness, said Jon Kutler, president of Quarterdeck Investment Partners Inc.

"Because shipyards and armored vehicles are among the least sexy businesses in the defense industry, it is not unusual for them to be grouped together," he said.

To make the deal, announced on Tuesday, investment firm Carlyle, which owns 49 percent of United Defense, had to call off an initial public offering of United States Marine, a provider of ship repair services for the U.S. Navy.

Defense offerings have been some of the bright spots in the moribund IPO market, which has struggled under the weight of a two-year-old stock slump.

"I think that they would've gotten more potentially for United States Marine Repair on a separate basis, but they wouldn't have been able to necessarily boost the value of United Defense," said Rick Phillips, who runs the aerospace and defense practice at investment bank Houlihan Lokey Howard & Zukin.

United States Marine's planned IPO would have raised about $170 million -- giving the whole company a price tag of about $325 million, $9 million more than United Defense agreed to pay for it, Phillips said.

"The diversification that (the deal) brings to United Defense clearly is enhancing the value in terms of the way people are looking at the company," he added.

Arlington, Virginia-based United Defense has been scrambling since the Pentagon announced plans to scrap the U.S. Army's Crusader artillery system.

United Defense shares fell about 12.5 percent between the cancellation and the time the United States Marine acquisition was announced. Investors cheered the news and the stock has gained nearly 7 percent on the New York Stock Exchange over the course of two trading days.

Credit Suisse First Boston analyst Pierre Chao raised his investment rating on United Defense shares to "buy" from "hold."

He had downgraded the stock when news broke that the Pentagon was considering canceling the Crusader system.

Carlyle Group, run by well-connected Washington insiders, raised $400.9 million in United Defense's initial public offering in December.

The company's ties to the Pentagon are strong -- former Defense Secretary Frank Carlucci runs Carlyle Group and James Baker, the elder President George Bush's secretary of state, and Richard Darman, the elder Bush's budget director, also work for Carlyle.

United Defense said it took steps to ensure the United States Marine acquisition was fair.

Carlyle executives who serve on United Defense's board of directors were excluded from the process and Merrill Lynch provided a fairness opinion to United Defense's board before the deal was made, United Defense said in a statement.

Before the United States Marine deal, many investors were drawn to United Defense's stock because of the Crusader system, which was expected to become more important to the company in the coming years, Houlihan's Phillips said.

United Defense, which is set to receive a termination fee of $520 million if the military does pull the plug on Crusader, has said it is lobbying to save the howitzer.

For more on international incestuous relationships, GO TO > > > The United Defense Matrix

March 13, 2002

Ship repairer United States Marine Repair files IPO

WASHINGTON, March 13 (Reuters) - United States Marine Repair Inc., which fixes and maintains U.S. Navy ships, cruise ships and tankers, has filed for a $160 million initial public offering.

The Norfolk, Virginia-based private sector company plans to use the net proceeds to reduce the principal amount outstanding under a credit facility, it said on Tuesday in a filing with the Securities and Exchange Commission.

It may also use some of the money for general corporate purposes.

The preliminary SEC filing did not disclose how many common shares are being offered in the IPO or the price range, but shares are being sold by the company and unidentified stockholders.

United States Marine has applied for a New York Stock Exchange listing under the symbol "URM" and hired Lehman Brothers, Credit Suisse First Boston, Bear Stearns and Credit Lyonnais Securities to manage the IPO.

Revenues for 2001 were $390.7 million, a decline of $5.4 million, from $396.1 million the year before. Revenues for the first three quarters of 2001 were affected by the U.S. Navy's postponement of repair work, said the company, which got 75 percent of 2001 revenues from the U.S. Navy.

United States Marine also posted gross profit of $63.5 million in 2001, a decrease of $2.9 million the previous year, and net income of $10.1 million compared to $9.2 million in 2000, the filing said.

Entities affiliated with the Carlyle Group, the private equity firm based in the nation's capital, owned 85.6 percent of the company, the filing said.

May 29, 2002

United Defense buys
United States Marine Repair Inc.

United Defense Industries Inc. agreed to buy United States Marine Repair Inc. for $316 million to add revenue from ship repair as it faces the loss of the U.S. Army's Crusader artillery-system contract.

Closely held U.S. Marine, like United Defense, is controlled by buyout firm Carlyle Group Inc. The company modernizes and repairs non-nuclear ships. Its plan for a public stock offering has been canceled, United Defense said in a statement.

United Defense gets about a quarter of its sales from Crusader, which is being developed in Fridley and has been targeted for termination by President George W. Bush and Defense Secretary Donald Rumsfeld. U.S. Marine will add to earnings starting in the second half and increase profit by 5 percent to 10 percent annually, United Defense said.

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From GlobalSecurity.org:

Marisco

Marisco is one of the largest marine and industrial services companies in Hawaii. The facility is located at the Barbers Point Deep Draft Harbor near Campbell Industrial Park, Kapolei, Hawaii....

Marisco operates the largest commercial drydock and biggest industrial machine shop in the state. Marisco serves the governmental, commercial marine and industrial sectors of Hawaii. The governmental sector includes U.S. Navy, U.S. Coast Guard, and Military Sealift Command work.

The local ship repair industry hit a low point after Navy jobs began to dry up. In the past, Navy work amounted to 60 to 70 percent of the business of the island's two largest private yards -- Honolulu Shipyard and Marisco Ltd. Budget cuts in recent years meant Navy contracts went from $37 million in 1995 to $13 million in 1999.

Company founder Alfred Anawati established Marsico in 1972. In April 2001 United States Marine Repair (USMR), America's largest non-nuclear ship repair, modernization, overhaul and conversion company, signed a letter of intent to buy Marisco, Ltd., one of only two full-service shipyards in Hawaii....

The Carlyle Group, a Washington, D.C.-based investment firm, owns USMR.

Frank C. Carlucci, former secretary of defense and assistant to the president for national security affairs under President Reagan is the chairman of Carlyle. James A. Baker, III, who has served as the 61st secretary of state in the Bush Administration and in other senior levels of the US government under three different presidents, is also a principal in The Carlyle Group.

The acquisition closed in mid-June 2001.

November 9, 2001

Abercrombie announces Pearl Harbor ship maintenance and repair contract

U.S. House of Representatives Press Release

Congressman Neil Abercrombie announced today that the Navy has contracted with Honolulu Shipyard, Inc (a member company of Pacific Shipyards International), of Honolulu, to provide repair and maintenance services to Navy surface ships at Pearl Harbor....

Honolulu Shipyard was selected to provide the services for one year, with options to extend the contract for an additional four years, one year at a time.

The firm is expected to employ 150-200 civilians, given a normal workload.

The contract was signed November 6, 2001.

"This is good news for our economy," said Abercrombie, a senior member of the House Armed Services Committee. "It means jobs and paychecks for island families, and the ripple effect will be felt by dozens of small businesses. . . .

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April 27, 2001

From The Honolulu Advertiser:

O`ahu Shipyard To Be Sold

United States Marine Repair, a Virginia firm owned by investors including several national political figures, yesterday announced plans to buy O`ahu shipyard Marisco Ltd.

United States Marine Repair is owned by the Carlyle Group, a Washington, D.C.-based investment firm whose chairman is Frank C. Carlucci, former secretary of defense for President Reagan.

Another principal in the firm is James A. Baker III, who served as secretary of state under former President Bush.

United States Marine Repair has shipyards in San Diego, San Francisco and San Pedro, Calif.; Norfolk, Va.; and Ingleside, Texas. The company specializes in maintaining U.S. Navy surface combat ships.

Retired Rear Adm. Dick Camacho, former commander of the Pearl Harbor Naval Shipyard, will lead United States Marine Repair in Honolulu, the company said.

“Because of Marisco’s excellent reputation and 29-year history of accomplishing quality work on difficult jobs, we are looking forward to having the yard and its employees join our family of shipyards,” B. Edward Ewing, chief executive of United States Marine and Carlyle Management Group, said in a statement.

The company said its annual revenues would grow to more than $500 million with the acquisition.

Marisco is one of two full-service private shipyards in Hawai`i....

September 25, 2001

House approves $365 million
for Hawaii military

by Ben DiPietro

Hawaii will receive $365 million for military construction projects in a fiscal 2002 defense spending bill approved Tuesday by the U.S. House.

Most of the money is for housing construction and renovation of housing on isle military bases, says Rep. Neil Abercrombie, D-Hawaii....

The largest of the projects is $50 million for a barracks complex at Wheeler Army Airfield, $47 million to replace 172 units of family housing at Marine Corps Base Hawaii (Catbird: That’s about $273,256 per unit, according to my fuzzy math – a bit expensive, I suspect, even for Hawaii) and nearly $38 million for the next phase of renovations of Pacific Command headquarters at Camp Smith.

Other spending includes $29 million to replace a hydrant fuel system at Hickam Air Force Base, nearly $12 million for a shipping operations building and $8 million for a drydock support facility at Pearl Harbor and $5 million for a command and control center for the Army's Pohakuloa Training Area on the Big Island.

The spending bill still must win approval from the Senate, then be signed by President Bush....