There have been plenty of busted auctions this year, with buyer and seller expectations set miles apart. That’s bad news for PE shops in search of exits, but some firms are getting creative by using partial exits (i.e., selling a minority stake).
It’s simple. You scour your debt agreements and find out how much you can sell without triggering a change of control clause. Then sell exactly that much, in cash, to another private equity firm. It should be a small enough chunk that at least someone can afford to bridge it. The capital structure stays in place, you gain liquidity and your buyer gets an attractively priced stake in a company with a pre-credit crunch capital structure already in place. It’s a way to rustle up some liquidity, which you could return to LPs, use to pay down debt, or help an ailing company make it through the downturn. Several sources have told me they’re seeing books circulate for the second time, but this time soliciting minority stakes. Buyers, they said, are taking greater interest.
A good example of this happened in late August. Berkshire Partners and Weston Presidio had been shopping its Party City retail chain, named AMSCAN, with no avail. “There was no way that company was getting sold,” a source said. It’s understandable, since Amscan isn’t small: the company has 950 locations and generated gross pro forma revenue of $1.7 billion in 2007. However, hitting the market a second time, the firms found takers for a minority stake. The company sold a 38% stake in itself to Advent International and retained its capital structure.
From what I can tell, Advent used all equity for the deal, but justified the buy with its discounted valuation. The firm did not return calls for comment. The entire transaction seems like a good comprimise to me, and I’d be interested to hear more examples of similar deals, done or in the market, from readers.