At Banks, Private Equity Desks Get Choosy

But analysts say Bank One's Polaroid bid has a potentially huge payoff.

Author:: Rebecca Byrne
Publish date:: Apr 22, 2002 7:12 AM EDT

Steep private equity losses at some of the nation's largest banks last quarter haven't completely chilled their buyout desks.

Bank One's

(ONE) - Get Report

bid to acquire the majority of

Polaroid's

assets for $265 million is a bet with a potentially huge payoff, analysts said.

Polaroid's CEO Gary T. DiCamillo said selling the company in its entirety to a strong buyer is "the best way to maximize enterprise value for our creditors." If the deal is approved, it could close early in the third quarter, allowing Polaroid to emerge from Chapter 11 bankruptcy.

Some analysts expressed disappointment at the price tag, with Ulysses Yannas, an analyst at Buckman, Buckman & Reid, calling it "ridiculous." But for One Equity Partners, Bank One's private equity arm, which manages $3.5 billion of investments, the deal represents an excellent opportunity.

That's because Polaroid can generate $950 million in film sales alone this year, according to Yannas, which translates into profits of about $550 million. Last year the company sold 13.1 million instant cameras and more than 11.1 million digital cameras. "If Bank One gets it, it is a phenomenal deal for them," Yannas said.

No Return

Most investments in private equity have eroded earnings at the major banks over the past few quarters, mainly as a result of bad bets in the telecommunications sector.

Bank One's investment securities losses, which include the corporate fixed-income and equity, venture capital and private equity portfolios, were $18 million in the first quarter, although that's an improvement from the $79 million in losses it posted in the same period last year. Meanwhile,

Citigroup's

global investment management and private banking revenue declined 12% in the first quarter.

J.P. Morgan Partners has perhaps suffered the most, with private equity losses of $255 million, driven primarily by the decline in the market price of Triton PCS, a provider of wireless personal communications services. And just this week,

FleetBoston

(FBF)

said it would scale back investments in private equity.

But the Polaroid deal shows that opportunities still exist for nimble players.

"Bank One's

private equity unit is under new management and it is one of the more aggressive players out there," according to Brooks Dexter, managing director of USBX, an M&A advisory firm.

Customary Conditions

Equity One Partners purchased the medical rehabilitation division of Smith & Nephew PLC last March and is also in the process of buying 75% of a German ship-building company called HDW. While these aren't the most exciting investments, a Bank One spokesman said he thinks the company will be rewarded for them.

Of course, it is possible that another buyer will step forward to buy Polaroid. Indeed, the Bank One spokesman said this is "a long way from a done deal," adding that the bankruptcy judge is required to hold an auction and that this is only the first bid. But analysts point out that the competition for assets has slowed considerably from the same time last year.

Meanwhile, some analysts note that while the price tag may seem low, all private equity valuations have come down, along with the entire market over the last year, and low prices don't always mean good buying opportunities.

While Polaroid's prospects may seem good to some, the firm has experienced a steep revenue decline and a big hit to liquidity, which will not make it an attractive buyout target to other banks that are already nursing their wounds from soured telecom investments.