Ten days ago, private equity firm Quadrangle Group was in the news for all the wrong reasons. It was sued by the SEC for its alleged role in a pay-to-play pension scheme in New York, and then settled for $5 million. It also settled with New York for another $7 million, and threw in a public statement about how firm co-founder Steve Rattner’s actions were “wrong, inappriate and unethical.”
Quadrangle had been hoping to settle for quite some time, in order to put the ugliness behind it and refocus on making new investments and selling old ones. And it would appear to be mission accomplished, as the firm today announced an agreement to sell portfolio company Protection One (Nasdaq: PONE) to GTCR for approximately $828 million, via a tender offer.
To understand Quadrangle’s return on investment, one must first run through a quick bit of history. The firm originally invested $92 million in 2004 to acquire both debt and equity securities in Protection One, a Lawrence, Kansas-based provider of electronic security services to the residential, commercial and wholesale markets. Also investing on that deal was Quadrangle’s in-house debt hedge fund, which since has spun out and renamed itself Monarch Capital Partners (the original investment was a separate decision and is not included in the $92m). Protection One was listed as a pink sheet at the time, but only around 3% or 4% of its shares were publicly-traded.
Quadrangle restructued the balance sheet in early 2005, converting some debt to equity, refinancing other debt and paying out a dividend. In early 2007, Protection One used stock to buy publicly-traded IASG, thus increasing its public float. Then, the following February, Protection One issued new subordinated debt. Quadrangle bought $23 million worth, with the investment coming out of its main private equity fund.
So, the total Quadrangle investment was $115 million, and it stands to pocket more than $182 million from the sale to GTCR. A source familiar with the situation puts Quadrangle’s IRR at around 38 percent. Not stratospheric, but pretty damn good for what has effectively been a PIPE from day one.
Moreover, the $15.50 per share sale price represents more than a 100% premium to Protection One’s trading price prior to a January announcement that it had retained J.P. Morgan to explore strategic alternatives (13.3% premium to Friday’s closing price).
None of this, of course, means that Quadrangle will be able to breeze toward that new fund it wants. But it is certainly a step in the right direction…