Sankaty's mammoth battle to tame GE's five-headed monster

Barnaby Lyons, Sankaty's Hong Kong-based head of Asia and a former Bain & Co consultant, and his Australian colleague David McWilliam, the Melbourne-based former CVC Capital Partners executive and Investec banker, identified the $1.9 billion opportunity in December 2014.

GE, like many traditional financial institutions around the world, was facing tougher regulatory standards and was looking to divest most of its financial services business, GE Capital, to re-focus on its industrial arm.

Opened Australian office

Sankaty, a global credit firm with almost $US30 billion ($42.2 billion) in assets under management, opened a five-person Australian office in 2013 and knew GE's domestic assets would be extremely difficult for buyers to understand, run diligence on and finance.

That was particularly the case for GE's commercial assets – a seven-part portfolio that, if it were in another part of the world, would probably have been split into seven auction processes. However, the Australian units on their own were not large enough for separate processes and Sankaty believed GE would welcome a bid for the entire collection.

(The final auction was whittled down to five units, after two were included as part of global deals. The five units were: leveraged finance; aviation, a series of loans and leases to corporates, wealthy individuals and government; asset-backed lending; equipment finance; and debtor finance, which is an invoice-discounting business.)

Sankaty engaged advisers for diligence and started work on the commercial assets late in 2014. It was proposing to approach GE and suggest bilateral and exclusive talks over the assets. However, GE announced there would be a formal auction process and hired Morgan Stanley to run the deal.

The announcement caught Sankaty by surprise but the team, led by Lyons and McWilliam, knew they had an advantage because it would be a complex deal and they had started work early. However, a timetable was set and they knew they needed to hurry to ensure they were ready come auction day.

Sankaty had mobilised diligence teams in its Melbourne, Hong Kong, Boston and London offices. It took great care – for example, hiring two valuers for each asset and two insolvency firms considering potential outcomes for the more stressed assets. It had legal reviews on every material credit across the portfolio of 500-odd loans. (KPMG handled the diligence, accounting and tax issues, while Ashurst partners David Stammers and James Marshall led the Australian legal team and Herbert Smith Freehills and Kirkland & Ellis helped with parts of the financing.)

Bankers in its corner

GE had Morgan Stanley's financial institution bankers in its corner, led by managing director Rick Ball and his right-hand man Mark Lewkovitz, along with King & Wood Mallesons partner Peter Stirling in charge of the legals and PwC helping with the accounts.

The deal, Project Paringa, was named after a small Victorian winery and in keeping with GE's nose for a local drop.

By the time final bids arrived on October 13, the auction was a two-horse race. Sankaty had teamed with Deutsche Bank, which was represented by Tim Eastwood and Beaux Pontak, and financiers including Deutsche, JPMorgan and National Australia Bank. Deutsche knew GE's team and process well, having teamed with KKR & Co and Varde Partners to buy GE's Australian consumer finance division in March.

In the other corner was the tough-talking Lone Star Funds, advised by Houlihan Lokey and funded by Citi. Lone Star did a lot of the work out of its Tokyo office, with the punchy and confident former Lehman Brothers banker Mark Newman heavily involved.

It quickly developed into a personality contest as much as a financial one.

The bids were close but GE, which had Melbourne-based business development director Stuart White and Australian business development boss Gavan Hatfield doing the heavy lifting, returned to Sankaty the following day with list of clarifying questions around matters such as currency breakdowns.

Risk-sharing structures

Sankaty was spending a lot of time camped in Mallesons' Melbourne office and coming up with some upside and risk-sharing structures to put to GE. It's understood another part of Sankaty's plan was offloading the debtor finance business to Scottish Pacific, and it had entered into an exclusive agreement with the buyer.

Things started progressing about one week after final bids, when the Sankaty camp's ideas to get GE over the line started to gain traction. Sankaty, including general counsel Ranesh Ramanathan, who had made a 12-hour stop-over from Boston for the meeting, and GE met in the main boardroom at Mallesons' office and came to an agreement on the commercial terms.

While it was time for the lawyers to get to work drafting papers, there was no rest for GE and Sankaty. Documenting the complex $1.9 billion deal took the best part of a fortnight and ensured Melbourne's hotels, laundromats and takeaway restaurants were kept busy.

The deal is expected to be completed before the end of 2015.