CVC, Leonard Green to make 5x on debt-burdened BJ’s Wholesale

  • CVC, Leonard Green invested $630 mln equity
  • Divs: $643 mln in ’12; $450 mln in ’13; $735.5 mln in ’17
  • BJ’s had $2.5 bln in long-term debt as of May 2018

CVC Capital Partners and Leonard Green & Partners stand to quintuple their money when BJ’s Wholesale Club Holdings Inc goes public next week.

BJ’s is expected to price its initial public offering on June 27 and trade the next day, a source said. The retailer is offering 37.5 million shares at $15 to $17 each.

The Westborough, Massachusetts, wholesale-club operator on the East Coast competes with the Sam’s Club division of WalMart Stores and with Costco Wholesale.

CVC and Leonard Green acquired BJ’s Wholesale in September 2011 in a $2.8 billion deal. The PE firms invested $630 million equity as part of the deal, Buyouts has reported.

CVC and Green each currently has 49 percent, or 43.5 million BJ’s shares. These stakes will fall to 33 percent each after the IPO and assuming the greenshoe is exercised.

The PE firms wasted no time in recouping their investment in the retailer. Since 2011, BJ’s has paid out three dividends to its shareholders — mainly the sponsors — that total roughly $1.8 billion, Moody’s Investors Service said in 2017.

The first distribution, $643 million, came in 2012, just a year after the sale to CVC and Green, Buyouts said. BJ’s paid a $450 million dividend in 2013, Buyouts reported. The third payout was in 2017 when BJ’s issued a $735.5 million dividend, the June 18 S-1 filing said.

CVC and Green reportedly tried to sell BJ’s last year. According to the New York Post, BJ’s hired JP Morgan to find a buyer. The PE firms were seeking offers of between $4 billion and $4.5 billion, the story said. The sale didn’t happen and the PE firms opted for BJ’s IPO plans.

At $16 a share, each PE firm’s stake is valued at roughly $700 million, for a combined $1.4 billion in paper gains. Including the $1.8 billion in dividends, the PE firms appear to be making ($1.8B plus $1.4B divided by $630 mln) at least 5x their investment.

While the PE firms will do well on the deal, BJ’s story is different.

The club is slow-growing, currently operating 215 large-format warehouse clubs in 16 states. That’s up 13 percent from the 190 clubs it had in 2011, when it was sold to private equity.

BJ’s was expected to expand nationwide but that didn’t happen; most of its clubs remain located on the East Coast, including Boston, New York and Philadelphia.

BJ’s reported $12.8 billion in revenue for the year ended Feb. 3, nearly flat with $12.4 billion for the prior year. Net income rose 14 percent to $50.3 million in fiscal 2018 from $44.2 million in fiscal 2017.

The most telling issue, however, is leverage. BJ’s had $1 billion in liabilities, including about $29 million in long-term debt, as of April 30, 2011, an SEC filing from that time said.

That’s changed. BJ’s now has $1.5 billion in total current liabilities as of May 5. Long-term debt, which is not included in liabilities, stands at $2.5 billion, the S-1 filing said.

Executives for CVC, Green and BJs declined comment.

Contact Christopher Baldwin, BJ’s CEO, at +1 774-512-7400