In case anyone wondered if CCMP Capital was serious about retail investing after the firm’s stalking horse bid for bankrupt Eddie Bauer, today’s news reaffirms it: The firm has hired Richard Zannino, former Dow Jones CEO, Saks Avenue CFO and Liz Clairborne EVP.
Zannino will be busy helping the firm identify targets as CCMP seeks to deploy the remaining 75% of its $3.4 billion fund, which closed in 2007. I spoke with Zannino and Managing Director Jonathan Lynch on CCMP’s enthusiasm for distressed retail deals and why Zannino is “not a fan” of traditional media assets.
First of all, will you be focusing on the deal side or operational side?
Richard Zannino: The plan is to spend about half of my time working with portfolio companies and the other half helping source, evaluate and execute new deals.
Private equity has always been a fan of retail thanks to its strong cash flows. But now that consumers have reined in spending, many of those deals, which buyout firms paid upwards of 10x Ebitda for, are looking like mistakes. Yet just this week, we’ve seen a number of new retail initiatives from private equity firms. Paul Pressler, the former head of Gap, has joined Clayton Dubilier & Rice, and Bo Arlander, a leader in Bear Stearns Merchant Banking’s retail practice, has started her own buyout firm. This, along with your move seems to indicate that private equity is bullish on retail. Can you explain why that is, given the environment?
Jonathan Lynch: Over our 25-year history, we’ve been active in retail. Our view is when others are very interested in our industry, it’s typically because it’s easy to do deals, and there’s either a lot of sellers in the marketplace or a lot of leverage available to do those deals, or both. Any time you find yourself in that position you need to step back and ask yourself why. That’s what we did a few years ago. We chose not to do the deals because they weren’t great return opportunities relative to the inherent risks. We look at the current situation the retail marketplace and we see great opportunity at a time when others are backing away. You can call it a contrarian point of view. Rich is a great example of somebody who knows the sector well and has a tremendous operational viewpoint which can only help in that realm.
What kind of sector mix does CCMP strive for in its funds? How exposed does the firm desire to be to retail and how exposed is it now?
Jonathan Lynch: We don’t have a set point of view around exactly how much we want to deploy in each sector. We react to opportunities we see in the marketplace. Retail is an area that we are becoming much more active in now than we were over the last three or four years. Its a microcosm of what we do in our fund. We chose the height of the market as a time to be big sellers, and returned $6 billion to our investors. We see that reversing itself fairly strongly now.
But M&A has been down, in part, because sellers won’t sell at the bottom.
Jonathan Lynch: There are two classes of sellers. For one, you have elective sellers. If you have the choice and believe things will improve, you’re going to wait. Teasing those companies out into the marketplace isn’t going to happen. The flipside is you have a lot of distressed sellers who don’t have the luxury of waiting. They need to raise capital now. Situations like (Eddie) Bauer are a good example of that, and we and a few others view that situation very opportunistically.
Buying companies like Eddie Bauer out of bankruptcy would be considered distressed or turnaround investing, which is not something I’ve heard the firm describe itself as. Is that a shift in strategy?
Jonathan Lynch: We’ve done distressed in the past and obviously active in it now. I bet we’ll continue to do it in the future. There are other things we’ve become known for as well, such as doing growth equity deals in partnership with family-run businesses. We don’t define ourselves by a single transactional style, we define ourselves by our core strategy of making operational enhancements in the businesses we invest in.
Speaking of Eddie Bauer, Jonathan, you told peHUB last month, regarding the auction of the company, that CCMP has shown it’s “only willing to bid what its worth to us.” In this case, that number seems to be $202 million. It seems to be worth more than that to others, according to reports naming numerous potential bidders. (The bankrupt company goes to auction tomorrow). Will you increase your bid?
Jonathan Lynch: We can’t comment on that.
Rich, given your background as CEO of Dow Jones, I’m curious about your thoughts on where private equity can safely invest in media? Is there such a thing as a healthy media asset, and where do you see the future of media investments?
Richard Zannino: There are definitely opportunities to invest in media. I would look for opportunities where you have compelling content that is indispensable to its users and that they can’t get it anywhere else. That’s a starting point. Beyond that, I’d look for opportunities to take that content and put it wherever, whenever and however the consumer wants it-opportunities to push content through multiple channels of distribution. And then you add the business model element to it. If you have the right content, you can charge for it and get paid for it, and attract unique audiences. That’s a very broad description of attractive properties. Whether that’s available in traditional media, new media, or as yet-to-be defined media isn’t clear. That space is moving so fast and business models aren’t yet clear. Just look at how fast Twitter has grown over the last couple of months, and lots of other examples like it. You have to be very careful and disciplined for that reason.
By your answer it sounds like despite CCMP’s interest in buying distressed assets, old media is not a place where CCMP would play.
Richard Zannino: I’m too new to speak for CCMP, but personally, I would not be a fan of investing in traditional media where there are legacy revenue and profit streams that need to be protected from new disruptive forms of media where the the economics can’t replace the economics of your traditional business model.