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Staring at the Sun: A Look at the Equity Checks from Sun Cap’s Bankruptcies

When Big 10 Tire flipped to Chapter 11 last week, it was the fifth Sun Capital Partners portfolio company to do so in 2009.

The turnaround firm’s standard response to questions regarding its bankruptcies is “look at the percentages.” And I would agree: Because of the size of its funds and because of the dirt-cheap prices it pays for failing companies, Sun Capital has many, many portfolio companies. Its website lists 70, to be exact.

BUT: Sun has had five companies go bankrupt in 2009. Add that to the five that ended up in bankruptcy last year and you’ve got an even ten (eleven if you count its PIPE into Sharper Image from Sun Capital Securities). That represents 14% of the total portfolio, which is quickly approaching a high percentage.

Someone from the firm once told me that Sun Capital can still hit its projected returns if 10% to 15% of its portfolio companies go bankrupt. At 14%, investors are surely biting their fingernails.

Even so, it’s important to look at the deal values of the companies Sun has lost:

  • It purchased Von Weise for $10 million in equity.
  • It purchased Fluid Routing Systems for an undisclosed amount.
  • It purchased Indalex Aluminum Solutions for $425 million total deal value. The firm split its $100 million equity investment over its third and fourth funds.
  • It purchased Drug Fair for $5 million in equity.
  • It purchased Big 10 Tires for $6.2 million in equity.

Last year’s bankruptcies:

  • It purchased Lillian Vernon for $9.9 million in equity.
  • It purchased Wickes Furniture for 19.875 million in equity.
  • It purchased Mervyn’s alongside Cerberus Capital for $1.2 billion, later purchasing Cerberus’ stake in the operating company for an undisclosed amount.
  • It purchased Powermate for $6.4 million in equity.
  • It invested $34 million in Sharper Image (this was out of the firm’s Sun Capital Securities fund).
  • It paid less than $1 million for Jevic.

So Marc Leder wasn’t off when he told me the firm’s acquisitions are typically 1% to 2% of its fund size last year. Most of these companies come from Sun’s third and fourth funds, which were $500 million and $1.5 billion, respectively. The real issue might be if this many deals from the firm’s current $6 billion fund start to fail. That fund includes the firm’s largest ever deal for Kellwood, an apparel company that Sun Capital took private in February 2008 for $541.8 million in equity with a total deal value of $762 million.

With Big 10 Tire, Sun Capital hopes to re-acquire the company out of bankruptcy. The firm has provided $27.89 million in DIP financing for the company. It’s not unlike another recent move on the company’s part-it just announced it would re-acquire Fluid Routing for $11 million total deal value. The firm had provided $12 million in DIP financing to the company.

*Equity amounts via confidential documents and publicly disclosed values.