BTU acquisition of Meiya - Lessons in how a Private Equity group makes a $220 million purchase while having only $100 million (actually, BTU never mentions this but the price was $236 million)

THE STORY

An inauspicious start to the BTU involvement with Meiya.  It agreed to acquire Meiya for $220 million but ended up paying $236 million and had to BORROW $136 million from the SELLER to conclude the transaction. BTU is given three months to pay the loan but at some point BTU asks the SELLER for an extra month to come up with the remaining $99 million owed to the SELLER.  Subsequently, it BORROWS $105 million from a consortium of banks to pay the remaining $99 million. BTU is NEVER able to "take out" the loan. Throughout its entire life, the Meiya investment gets saddled with the debt and its costs and risks.

The Middle East investors that actually come up with the money for the purchase believe they bought Meiya for $220 million.  Abdulmohsen Hayat, the 44% owner of BTU Holdings, believes that Meiya was acquired for $220 million.  The BTU Ventures website announces the $220 million acquisition. Wael Al-Mazeedi is SILENT regarding the price in two of his affidavits filed in Massachusetts courts. 

Simple math. Price tag as told to EVERYBODY by BTU - monies actually received by PSEG - Cost of not having all the money required to complete the purchase in the first place = $220 million - $236 million - ($105 million - $99 million) =  -$21 million.

Questions: 

• Were Middle East investors that funded the Meiya acquisition in the "hole" or in the "red" already just a few months after the agreement by BTU Power Company to purchase Meiya was announced?
• Were they ever made aware of that hole?

Preliminary Conclusion: 

The "numbers" never quite seem to make sense regarding anything BTU states as fact. Based on allegations in the IFIC litigation and Hayat litigation it appears that NOBODY ever gets REAL financial statements regarding their investment or ownership stake.

PSEG US Securities and Exchange Commission Mandatory Filings

PSEG 10-Q (filed October 29,2004)  Notes to Condensed Consolidated Financial Statements (page 52)

On October 1, 2004, Global entered into an agreement to sell its 50% equity interest in MPC to BTU Power Company (BTU) for approximately $220 million.  The sale is expected to close in the fourth quarter of 2004 and is subject to customary closing conditions and approvals.

PSEG form 10-K (filed March 1, 2005)  Notes to Condensed Consolidated Financial Statements (page 127)

... The sale closed on December 31, 2004 for approximately $236 million, of which $100 million was paid in cash and the balance of approximately $136 million was provided in the form of a secured promissory note due on March 31, 2005.

PSEG form 10-Q (filed May 6, 2005) Notes to Condensed Consolidated Financial Statements (page 22)

...In January 2005, a $38 million promissory note payment was received.  Thereafter, the note was amended and restated to extend the maturity date to April 2005 and increase the outstanding receivable.  On April 29, 2005, Global received approximately $99 million representing the full payment of the outstanding receivable.

IFIC Lawsuit

BTU Power Company II is identified as the "Fund" in this complaint. The last bullet point in this section might explain part of the reason for the confusion regarding the "numbers" for Meiya.

• The Fund paid approximately US$220 million for the shares on December 31, 2004.  [Paragraph 11]
• To finance the acquisition price, Al-Mazeedi raised equity from Middle Eastern investors in the fund, and secured a 12-month US$105 million bridge debt facility on April 29, 2005 with Dresdner Bank AG ("Dresdner"), which came due on April 28, 2006. [Paragraph 13]
• Al-Mazeedi sought to replace the US$105 million Dresdner debt facility with fresh equity, but was unable to do so.  [Paragraph 16]
• In order to buy more time from Dresdner, certain Fund investors then paid in additional equity.  In return, there was an extension of the Dresdner financing for the Fund by an additional six months.  [Paragraph 17]
• That debt repayment extension matured in October, 2006  [Paragraph 18]
• BTU had no way to repay the loan, since Al-Mazeedi's fundraising had again failed.  Certain of the Fund's investors repaid the full loan with their own financing.  This remedial action was taken under express threat of "last minute foreclosure by Dresdner.  [Paragraph 20]
• ... no audited financials of the Fund were provided then or at any time to the Fund's Investors, including Plaintiffs.  [Paragraph 26]

Hayat Original Lawsuit

Some confirmation of the fact that BTU Power Company committed to purchase something from a company regulated by, among others, the US Securities and Exchange Commission, the New Jersey Board of Public Utilities, the Federal Energy Regulatory Commission, WITHOUT having the money to buy it. 

• Although neither BTU Holdings Company nor any of its affiliates and subsidiaries had the required $220 million needed for said purchase, Al-Mazeedi, (without knowledge of or notice to Hayat), transferred various funds which had been designated at the time of investment for specific purposes (having no connection to the contemplated MPC purchase) to BTU Power Company and/or to BTU Power Company II and held out and presented the funds to another investor as capital owned by the BTU Group in order to convince this other investor to fund the remaining cost of the purchase.  [Paragraph 77]
• ...the MPC investment was purchased in December 2004 for approximately $220,000,000.  [Paragraph 78]

Hayat Amended Lawsuit

Again, just a guess, but maybe the following statement from Hayat's Amended Complaint goes some way towards explaining the murkiness of the picture.

"Since the spring of 2005, Defendants have refused Hayat's numerous requests for detailed information about the operations of the BTU Group, and have denied repeated requests to inspect books and records, financial reports, and minutes of shareholders' and directors' meetings."  [Paragraph 21]

BTU Ventures Website

BTU's announcement is taken almost verbatim from PSEG's announcement (see link below).  They even copied PSEG's line regarding the accounting impact of the sale "...on an after-tax basis, is expected to be earnings neutral for PSEG."- how could BTU have any clue about what impact the sale would have on PSEG earnings?  It obviously has not been updated for more than six years and it obviously does not paint a TRUE picture of the actual transaction.

Newark NJ/Burlington MA - October 4, 2004

PSEG and BTU Power Company ("BTU") announced today the signing of an agreement for BTU to purchase from PSEG Global its 50% equity interest in Meiya Power Company Limited ("MPC").  BTU Power will pay approximately $220 million for the shares.

Link: PSEG Investor News: Announcement of sale of its stake in Meiya to BTU Power

3rd Al-Mazeedi Affidavit

BTU Power Company II is identified as the "Fund" in this affidavit. Wael Al-Mazeedi skips a lot of steps in his explanation of how he purchased Meiya and omits any mention of the price. He also gets his chronology, or perhaps his terminology, wrong, since PSEG repeats time and again in its filings that the sale was CLOSED on December 31, 2004. The process extended into 2005 because BTU didn't finish paying until April 29, 2005.

The Middle East investors said that $105 million was borrowed while Wael Al-Mazeedi alleges it was $100 million. Interesting discrepancy. In any event, the loan had ballooned to $110 million when BTU sold Meiya to Standard Chartered.

Question: Is everybody reading the same financial statements?

• On December 31, 2004 the Fund contracted to purchase, and in 2005 closed on the purchase of, a 50% equity interest in Meiya Power Company.....  [Paragraph 8]
• To finance the acquisition the Fund raised equity from Middle East investors...and secured a 12 month $100 million debt facility from a syndicate of international banks. [Paragraph 8]
• In or about October 2006 when the Fund was unable to replace the $100 million debt facility with fresh equity, three of the preferred shareholders in the Fund -- Dubai Islamic Bank PJSC, Dubai Investment Group Ltd., and Abu Dhabi Islamic Bank (collectively the "Lender Investors"), all located in the United Arab Emirates ("UAE") and together owning more than 72% of the issued and outstanding Class A shares -- agreed to lend money to the Fund to take out the approximately $100 million debt facility which was already in default. [Paragraph 8]
• After repayment of approximately $110 million in carried debt owed by the fund to the three Lender Investors...  [Paragraph 9]

1st Al-Mazeedi Affidavit

BTU Power Company is identified as "the Fund" in this affidavit. Well, at least here we have and admission from Wael Al-Mazeedi that the original investors in BTU Power Company didn't want to participate in the Meiya purchase. This means, of course, that he had to go look for money to buy Meiya but didn't find too much of it.

Question: PSEG sold Meiya to BTU Power Company, not BTU Power Company II, a separate and distinct entity. Was PSEG told that the "bulk" of the investors in BTU Power Company were not going to back the transaction.  I think PSEG might have wanted to know if they were dealing with someone with money - maybe they didn't KNOW everything about BTU. Again, Wael Al-Mazeedi skips some critical steps in his affidavit regarding the acquisition process

• With the exception of two investors, I was unable to convince the bulk of the Fund's investors to back the MPC deal...  [Paragraph 26(a)]
• ...a new special purpose vehicle ("SPV" or "BTU Power Company II") was established to acquire PSEG's 50% equity interest in Meiya Power Company....  [Paragraph 26(b)]
• To Finance the acquisition price, my team and I were able to raise additional equity from new investors (also in the Middle East) and to secure a 12-month $100 million debt facility from a syndicate of international banks.  [Paragraph 26(c)]

OBSERVATIONS
As documented in this blogs, the subsequent sale of Meiya by BTU to Standard Chartered engendered several lawsuits. The sale took place a little over two years after BTU finally finished paying PSEG the full amount of the purchase price. Subsequently, this PRIVATE EQUITY company could not come up with ANY MORE EQUITY to take out the loan. We don't know all the details but it appears that this loan, used to pay the remaining $99 million of the purchase price, probably was not the cheapest loan in the world, specially considering that BTU pledged ALL the shares owned by it in Meiya (worth $220 or $236 million or???) as security.

The numbers just don't add up on many levels.