On its website, private equity firm Olympus Partners used to boast about how it had “never executed a leveraged recapitalization of an existing portfolio company.”
You won’t find that claim there today, however, after the firm announced a $110 million leveraged recap of Taco Bell franchisee K-Mac Enterprises Inc. The deal included a $59 million dividend for existing shareholders (i.e., Olympus), $2.7 million in bonuses to 25 K-Mac employees and a bunch of left over working capital that K-Mac can use to buy and build new restaurants.
So what happened?
“The company had leverage of less than 1x EBITDA before the recap, which wasn’t sensible from a tax perspective” explains Rob Morris, managing partner of Olympus. “We increased leverage by doing the recap, but it’s effectively less than it was after the original deal — 2.5x versus 3.5x — which is also a heck of a lot less leverage than your typical LBO and is a much more efficient balance sheet than no debt at all.”
An alternative option, of course, would be to sell the company. Morris says that Olympus began moving down that road before last fall’s financial collapse, but backed off due to falling multiples and the inability of buyers to secure leverage of their own.
As for losing its ability to use “no leveraged recaps” as part of its sales pitch, Morris doesn’t expect any fallout. “We think our investors are able to distinguish between heaping on debt just because it is available as during the recap craze, which was solely an IRR manipulation game, and sensible management of the balance sheet by the board.”