Forstmann Little Plans To Land Gulfstream –

Forstmann Little & Co. is planning to end its nine-year flight with Gulfstream Aerospace Corp. after the firm merges its remaining 23% stake in the company with General Dynamics Corp.

Gulfstream this month announced it would be acquired in a stock-swap with General Dynamics, a defense manufacturer. The deal, should it close, would value Gulfstream’s stock at about $4.8 billion, based on General Dynamic’s present price of $64.50. The agreement provides Forstmann the right to sell its 8% stake in the new company-which would be worth $1.1 billion at today’s price-soon after the closing. The merger is expected to close in the third quarter.

Forstmann Little says it likely will sell its shares by the end of the year, depending on market conditions. “This essentially concludes our investment in Gulfstream,” said Sandra Horbach, a partner at the firm.

The merger is another interesting twist in the life of Gulfstream, a Savannah, Ga.-based manufacturer of corporate jets. The firm’s most recent challenge was finding a way to fully exit the investment outside of the public markets as the company was not an obvious target for any strategic buyer.

Public equity investors had not become comfortable with Gulfstream and had undervalued its stock because there are no comparable publicly traded companies, Ms. Horbach said. Gulfstream’s stock was trading at about 14-times 1999 earnings before the announced merger. Merrill Lynch & Co. and Goldman, Sachs & Co. brought Gulfstream to the attention of General Dynamics, which was looking for an investment to boost its earnings per share after the Department of Defense indicated it would not support its announced acquisition of Newport News Shipbuilding.

The merger, if all goes as planned, marks a quick turnaround for Gulfstream. On October 12, 1998, the company’s stock was trading at only $33 per share. Now, the value of its stock has almost doubled in only seven months. Before the announced merger, Gulfstream’s stock was trading at $55 per share and the company is receiving a 17% premium by trading for General Dynamic’s stock.

At the end of the day, Forstmann Little will generate about a 50% net IRR for its equity fund and a 25% net IRR for investors in its sub-debt fund, Ms. Horbach said. However, the investment was far from easy.

To boost revenue at Gulfstream, Forstmann Little in the late 1990s helped the company build its backlog of orders for corporate jets (it is now double the amount of yearly sales) which include selling more planes to international customers.

The firm committed $100 million in equity in 1990 when it bought the company from Chrysler Corp. in an $850 million buyout, and soon committed an additional $100 million to keep the company out of bankruptcy.

General Partner Theodore Forstmann has said he spent three-quarters of his time from 1993 to 1996 working to increase the company’s profits and market share in order to engineer the recovery. Ms. Horbach, too, spent much of her time working on Gulfstream.

Getting Creative with Turnaround

The firm introduced new programs such as leases for jets and share programs (where several customers could purchase of a jet together) to spur growth.

Forstmann Little originally tried to bring the company public in 1992 but failed to generate enough interest from investors. It did bring the business to an IPO in 1996, at $24 per share, reducing its equity to a 48% stake from 100%.

The group then took the company to a secondary offering in May 1998 at $43 per share, decreasing its holding to 23% (BUYOUTS June 1, 1998, p. 16).

The merger comes on the heels of Forstmann Little’s exit from another 1990 investment, the $1.5 billion buyout of General Instrument Corp., in which the firm generated similar returns after a rough start (BUYOUTS May 17, p. 11).