In the context of the New York Times private equity take-down, I think most peHUB readers would say that there is value created by private equity firms. It’s also safe to say that buyout bosses are just as capable of destroying value. Taking it a step further, I’m of the opinion that while that dividend recap may take some risk off the table, they are generally not necessary. I also agree with Dan that management fees are an abomination.
With that out of the way, here are examples of five more buyout-backed companies which underwent a dreaded dividend recap and ended up in bankruptcy. There isn’t necessarily a straight line from recap to bankruptcy, nor is there a clear case that the company wouldn’t have failed on its own apart from private equity involvement. But it sure doesn’t look good. In some cases, the firms re-invested in the company, possibly to avoid a clawback if the fund from which the investment came from ends up underwater.
1. JG Wentworth | JLL Partners
JLL Partners invested in the company in 2005 and since then took out 2x its initial investment through two recapitalizations. It also sold $145 million worth of equity on a private exchange run by Bear Stearns. The private placement paid off J.G. Wentworth’s second-lien debt and valued JLL Partners’s remaining equity position at $450 million, generating a 6.1x return on its original $125 million investment. Then the structured settlement company went bankrupt in May.
However, unlike with many LBO-backed bankruptcies, JLL Partners has decided to “do the right thing” to stave off LP and/or employee outrage. The firm agreed to commit $100 million in new equity to support ongoing operations for J.G. Wentworth. I dubbed it a “reverse dividend recap.” Read more on that here.
2. Eurofresh | Bruckmann Rosser Sherrill & Co.
Bruckmann Rosser invested $20 million in EuroFresh in 2001 and it recouped this investment during a recapitalization in 2004. The firm also collected more than half of a $122 million special dividend from Eurofresh through a deal with Banc of America Capital Partners. Eurofresh went bankrupt in April. Read more on that here.
3. United Subcontractors | Wind Point Partners
In October 2004, Wind Point acquired the Edina, Minn.-based company for about $275
million and a dividend recap took place in 2006, realizing a small return for Wind Point, according to Buyouts. The company went bankrupt in April.
4. Anchor Blue | Sun Capital Partners
In 2003, the turnaround firm invested a mere $2.32 million from its third fund to buy Anchor Blue, a Levis Factory Outlet retail business. In 2005 the company sold a 25% stake to Ares Management for $30 million, and also took on new mezzanine debt from Ares. Sun invested an additional $16 million in the company, and all was going well until the economy tanked and Anchor Blue’s sales fell off. The company filed for Chapter 11 in May. After all is said and done the firm will came out with a decent return from the deal even though the company failed. Read our story on that here.
5. Mervyns | Cerberus, Sun Capital Partners
Cerberus made money on the deal. Sun Capital Partners did not. Cerberus and Sun bought the company together. Sun brought Cerberus in because the $1.2 billion deal was too large for it to do alone. Cerberus came in because it saw value in the retailer’s real estate. So they split the company into real estate and operating companies. Cerberus sold the real estate business and earned 2.5x its money. Sun Capital bought back control in the company and ended up holding the bag when it fell into bankruptcy. This is a situation that doesn’t have debt as its demon, but still evidence of a buyout firm which earned money in a failure. Read more on that here.