Awful Deals

You might think the business of capital formation is fun and exciting. Actually it’s a steady grind where about half of the deals never get inked. It’s about lawyers and regulations. The road shows are just a pain in the ass. Getting folks to pony up money is not as easy one might think.

I worked on a deal years ago. The objective was to build a factory in Mexico. There were strong equity partners. Darling Delaware and a rising big shot, Carlos Slim were the backers. My job was to arrange the senior debt for the project.

Darling Delaware is a very successful company. They’ve been around for a century. Their business is rendering. The proposed new factory would also render.

The business plan was good. This was going to be a moneymaker. The problem with the deal was optics. Rendering is a nasty business. The raw material is cow guts and fat. The finished product is cooking oil.

The plan called for trainloads of guts to arrive at the new factory every day. The trains would come from all over Mexico and suffer delays. There were estimates on how much “spoilage” the delays might cost. All the details were spelled out with spreadsheets and pretty graphs for the potential lenders. The numbers were fine. But the thought of train cars filled with guts sitting on some side rail for a week or two put a taint on the deal.

The lawyers tried to dress up the documents. The words “Cow guts” were deleted and the word "Offal was" inserted:


Wikipedia

Offal refers to the internal organs and entrails of a butchered animal.

The lawyer’s trick did not work. When a black lined (edited) version of the offering document went out, investors just laughed. The deal quickly got nicknamed the Offal Deal. From there some smart guy renamed it again as the Awful Deal. That name stuck.

The Awful Deal did get done. But it was an awful deal to work on.

I bring this up in the context of Groupon and Morgan Stanley. The IPO for this awful deal gets priced tonight. It has been hacked back to a fraction of what was originally contemplated. I understand that the initial float will be only 16mm shares.

The size and pricing is designed to create a positive market “pop” tomorrow AM. That might well happen. But there is a boatload of stock that is on the shelf, a secondary is coming on this deal.

For the folks at MS this was their awful deal. It might prove to be the same for investors.