Vestar Mulls Fund Raising, Considers $2 Bil. Target –

Although the firm has called down only about half the capital in its $803 million third fund, Vestar Capital Partners is talking to its investors about launching a new effort with a target between $1.5 billion and $2 billion, Vestar L.P.s said.

The firm is in the process of trying to close a $500 million buyout of St. John Knits, and sources say after this, and perhaps one more buyout, Vestar will start pre-marketing the new fund, probably in three to six months, some L.P. sources and intermediaries said. Vestar has completed eight or nine investments since it wrapped Fund III in early 1997 (BUYOUTS April 7, 1997, p. 4). “They’ll start to seriously fund raise in the second and third quarters and will close in the fourth quarter of 1999,” one investor said.

Vestar Chief Executive Daniel O’Connell denied the group is thinking about Fund IV. “We do not have any plans right now to raise a fund this year. It all depends upon our investment rate and performance,” he said, declining to comment further about a possible fund.

Another L.P., who declined to be identified, said he and others, however, are looking forward to Vestar’s coming to market in 1999.

“That will be the toughest fund to get into this year,” the L.P. said, adding that he had not completed enough homework to know whether he will recommend that his pension invest in the new effort.

Banking on Fund II’s Track Record

Limiteds will need to base much of their due diligence on Vestar’s performance in the $260 million Fund II and not the $803 million Vestar Capital Partners Fund III, L.P. because it is too early to gauge the performance of the investments it made in that 1997 partnership.

However, the firm in the fall did exit its Fund III buyout of Sun Apparel. It sold the company in which it had invested $70 million in equity to Jones Apparel Group for about $212 million in cash and stock, realizing about 150% of the capital on its investment in less than a year and still retaining an equity stake in the public company.

Still, L.P.s will need to have faith that Vestar can properly invest a billion-dollar fund without the record to prove it, as most of the group’s realized investments come from a fund less than 20% as large as the vehicle the group will soon be raising. Vestar is expected to make equity commitments of between $50 million and $100 million each for buyouts in Fund IV.

As of June 30, 1998, Vestar Capital Partners II, L.P., which the group raised in 1993, has posted a 63% net IRR and has realized $1.31 for each dollar L.P.s committed to the fund, according to an L.P. Since then, the group has also sold fiberglass materials maker Clark-Schwebel to Stamford Capital Group for $488 million.

Vestar’s limited partners say they find this impressive, but not all of them believe it is an indication of how the group will perform when investing in mega-deals.

“My biggest issue is that the above-$1 billion market is getting crowded,” said one fund-of-funds manager who currently is invested in a Vestar vehicle and is concerned the group may start paying higher purchase multiples.

Several other Vestar L.P.s said, however, they would be comfortable with the group setting a larger target.

“For a seasoned buyout firm to be dealing with $2 billion is not as breathtaking as many of my colleagues seem to think,” said Rosalie Wolf, treasurer of the Rockefeller Foundation.

Vestar strengths, sources note, include having a deep team of 24 professionals (19 in New York and five in Denver) and a group of senior partners that is young and has invested together for more than 10 years. Last summer, the firm also added former Secretary of Energy Federico Pea as a senior adviser to help it spot opportunities in the energy, rail and airport industries (BUYOUTS July 20, 1998, p. 4).

But, Vestar investors point out that the partners who run the firm are all financial engineers as opposed to operating partners, making it difficult for the group to complete anything but growth investments during a time that purchase multiples for such companies are reaching all-time highs.

Mr. O’ Connell believes Vestar can help a business with its operations through Vestar Resources, a group of CFOs and COOs that acts as a complement to management teams at portfolio companies but does not work on new transactions.

“We don’t hire CEOs of corporations to be partners like other firms, but we do have this resource,” Mr. O’ Connell said.

Vestar, in this difficult deal-making environment, has found a bargain in publicly traded St. John Knits, an Irvine, Calif.-based manufacturer of high-end women’s apparel, according to a retail analyst. However, the buyout may become an uncomfortable fit.

Buying St. John Knits at a Discount

The group last month agreed to back St. John Knits CEO Robert Gray, who owns 11% of the company, in his bid to sell the business and retain an equity stake.

Several weeks earlier, St. John Knits adopted a poison pill, making it difficult for buyers not approved by Mr. Gray to bid for the business.

Mr. O’Connell said Vestar had not met with Mr. Gray until after St. John Knits took that posture. “That was done prior to our meeting with Mr. Gray, and it was totally unrelated to this transaction,” he said.

Subsequently, St. John Knits shareholders have said they believe Vestar’s asking price of $28 per share, or $500 million, is far too low and have threatened lawsuits. St. John Knits was trading at $48 per share in April and fell to $13.25 per share in mid-October after manufacturing problems, low customer demand and the volatile stock market had an impact on the stock price. The business rebounded to about $21 per share at the time of Vestar’s offer and is trading at $26 per share at press time.

Offering Fair Value or Undercutting?

Mr. O’Connell believes that Vestar has offered a good price for the business. “We think our proposal is full and fair and is representative of what multiple most apparel companies are trading at right now,” he said.

A buy-side analyst at a small-cap value investor pegged a higher price, $35 per share, or roughly $610 million, as a fair price for the buyout. That price values the company at about nine times EBITDA, said Mark McCabe at J.L. Kaplan Associates, adding that he would not sell at $28 per share.

St. John Knits has retained Merrill Lynch & Co. banker Steve Barnoff and Wasserstein Perella & Co. banker Kenneth Tuchman to analyze the offer for its fairness. The bankers declined comment. The deal is expected to close by April if stockholders approve the deal. Chase Manhattan Corp. is arranging the financing.