Behrman Capital Lets Condor Systems Fly –

Behrman Capital last month sold its 60% stake in Condor Systems, a defense electronics contractor, to an investor group that included Global Technology Partners and DLJ Merchant Banking Partners for $134 million, said Darryl Behrman, a managing partner at the New York- and San Francisco-based firm.

Condor’s auction, which was arranged by investment bank Bowles Hollowell Connor & Co., attracted interest from several bidders, and eventually the company narrowed the field to two qualified financial buyer groups: the Global Technology/DLJ Merchant Banking group and another group which Mr. Behrman declined to name. Although Mr. Behrman described the bids from the two financial buyer groups as similar, Behrman Capital and the company ultimately chose the group that included DLJ Merchant Banking because of a belief that DLJ Merchant Banking Partners’ relationship with parent investment bank Donaldson, Lufkin & Jenrette would ensure financing to close the deal.

In the end, the deal was financed with a $100 million offering of 11.875% subordinated notes due 2009 and underwritten by DLJ and NationsBanc Montgomery Securities LLC. DLJ Merchant Banking and Global Technology also have secured a revolving credit facility for the company led by a syndicate of banks, said David Jaffe, a DLJ Merchant Banking managing director. Mr. Jaffe declined to disclose the banks in the syndicate.

According to Mr. Jaffe, the acquisition marks the second investment of a strategic initiative between DLJ Merchant Banking and Global Technology-which is led by former Defense Secretary William Perry and former head of Central Intelligence John Deutch-that targets the defense industry. The two groups also teamed up on last year’s acquisition of DeCrane Aircraft Holdings, a manufacturer of components for commercial aircraft.

Taking a Risk with Non-Voting Shares

Interestingly, DLJ Merchant Banking’s position in the company does not come with voting rights, although Paul Kaminsky and Bob Hermann of Global Technology both will serve on the company’s board. A source familiar with the transaction said DLJ Merchant Banking opted for non-voting shares because the group’s parent company, AXA Group, is a French company, and Condor’s security clearances bar it from being more than 5% owned by a foreign entity. Mr. Jaffe declined to comment on the matter.

Although the sale will mark a complete exit from Behrman Capital’s Fund I-netting the firm an IRR of approximately 60%, according to Mr. Behrman-it will not spell the end of Behrman Capital’s involvement in Condor. The firm has agreed-or demanded-to reinvest as much as $50 million from Behrman Capital II L.P. in the acquisition of Condor and subsequent add-ons-although DLJ Merchant Banking and Global Technology will invest substantially more than this amount. The investment initially will give Behrman Capital an approximately 30% stake in the company. A source familiar with the deal said Behrman Capital late in the negotiations made its sale of the company conditional upon maintaining an equity stake in Condor. Mr. Jaffe downplayed this, saying the investor group believes it can benefit from Behrman Capital’s experience with the company and its knowledge of the defense industry.

According to Mr. Behrman, the firm still believes Condor has growth potential but had to exit the investment because the investment life of Behrman Capital L.P., the firm’s debut fund, is coming to an end. “We came to the point with Fund I [waning], and we realized that we could build this [company] to $500 million to $1 billion [in revenue],” he said.

Mr. Jaffe declined to comment on the amount of revenue growth the new owners are anticipating. “We have no specific targets, but the management team clearly has the ability to grow the company greatly,” he said.

San Jose, Calif.-based Condor had 1998 revenue of approximately $140 million and, since the initial buyout, has grown through the acquisition of three add-ons, including Whittaker Electronics Systems (BUYOUTS Nov. 10, 1997, p. 4). The company manufactures signals intelligence, electronic support measures and electronic countermeasures systems for the electronic warfare industry. Behrman Capital Partner William Matthes will have a seat on the company’s board.

Behrman Capital first acquired Condor in November 1996 through a $24 million equity investment from Fund I, paying approximately $117 million in a leveraged recapitalization (BUYOUTS Dec. 23, 1996, p. 8).

The firm currently has three portfolio companies remaining from Fund I. The minority investment in Condor brings Fund II to approximately 33% invested, according to Mr. Behrman.