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Refco on the block: Private equity firm interested in buyout

NEW YORK – Troubled commodities broker Refco Inc. could be essentially scrapped for its parts, with talks Monday aimed at selling the company’s core futures brokerage business to a group of private investors.The consortium of would-be buyers are led by private buyout firm J.C. Flowers & Co. LLC, which specializes in taking distressed financial companies and either turning them around or selling the pieces to other companies. Refco and Flowers are in “advanced negotiations.” A Refco spokeswoman had no other comment, while a Flowers spokesman could not be reached for comment.”There is a network of potential buyers for certain pieces of this company,” said Denise Valentine, senior analyst at financial consulting group Celent. “It could be interesting to see how parts of Refco get morphed into other firms.”The talks center on Refco LLC, the subsidiary that houses the nation’s largest independent commodities brokerage and one of the few units still relatively untouched by the $545 million accounting scandal that erupted last week and resulted in the arrest of former Chief Executive Phillip Bennett on charges of securities fraud.The situation at Refco, which just went public in an August stock offering, has deteriorated quickly following the disclosure last Monday that Bennett hid a $430 million debt from the company’s books, a figure that prosecutors said was as high as $545 million at one point. Bennett was placed on leave after repaying the company $430 million plus interest.The company last week froze customer accounts in its Refco Capital Markets offshore broker subsidiary until next week, and said Thursday it would liquidate its Refco Securities LLC subsidiary, which trades stocks, bonds and credit products.While the company has refused to comment beyond its terse, now-daily press releases, the subsidiary moves speak to an exodus of customers from all parts of Refco, analysts said, leading to a loss of assets and revenue potentially far greater than that caused by Bennett’s alleged misconduct.For Refco, J.C. Flowers & Co. is likely less a white knight and more a repo man. The company, formed in 2000 by former Goldman Sachs Group Inc. investment banker Christopher Flowers, has revived the fortunes of some companies, most notably Japan’s Shinsei Bank Ltd. Flowers also led the group that purchased Dutch bank NIB Capital NV for $2.5 billion in August, and last month agreed to buy the wholesale unit of insurer Marsh & McClennan Co.In Refco’s case, however, customers are unlikely to return to the company. Commodities traders are likely to have already moved their accounts to other brokerages.”I think, in this case, the parts of Refco are greater than the whole,” Valentine said. “There’s been too much damage to turn it around and revive it. And there’s plenty of interest.”Commodities and futures trading has become increasingly attractive to major Wall Street firms who have faced a sluggish stock market and low bond yields in the past year. Commodities such as oil, metals and agricultural products have done very well. Merrill Lynch & Co. launched its commodities trading this year, and it’s considered a key piece of most investment and banking companies’ growth strategies.Refco’s stock remained halted Monday on the New York Stock Exchange as regulators there determine whether the company has provided enough information to investors to resume trading, or should instead be delisted. The company’s bonds, which dropped precipitously last week, rallied on word of the Flowers buyout talks.It’s unclear whether Refco’s other subsidiaries would be included in buyout talks, or if they would simply be left to fend for themselves and likely file for bankruptcy.There’s also no telling how much Refco shareholders might see in any potential buyout scenario. The stock plummeted more than 70 percent since Oct. 7, the last day of trading prior to the company’s first disclosures. It’s unlikely investors will recover the total value of their investment. However, if pieces of Refco are bought by a more established public company, that could be better for Refco shareholders in the long run.”Just as an example, what if Refco was bought up by Citigroup?” Valentine said. “I think people would be quite happy trading in shares of Refco for Citigroup.”Refco noted Monday that it has hired the services of Greenhill & Co., another investment bank, in its talks with Flowers. Refco had hired Goldman Sachs, one of its underwriters in its August initial public offering, as its financial adviser during the crisis, but hired Greenhill to avoid any conflict of interest due to Flowers’ history as a Goldman employee.


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