The Curse Of The Deal of the Year Award

This is why we now give awards based on exits and not deals.

Yet another recipient of a Buyouts Deal of the Year awards has soured. Sterling Investment Partners’ award-winning take-private target, U.S. Shipping, filed for bankruptcy. (See below for a list of other cursed winners.)

The deal was named small market deal of the year in 2002, the year Sterling purchased the oil transportation services business of Amerada Hess Corp. for $198 million. U.S. Shipping paid approximately 5.5 times pro forma EBITDA and had a number of co-investors to its $40 million equity stake, according to the accompanying story.

Buyouts deemed this deal a winner because of the special five-year revenue guarantee it had locked in with the seller. It seems like a good plan, except Sterling probably didn’t expect things to turn sour after that five-year period ran out.

From the story:

The way it works is if U.S. Shipping can’t find any customers as its vessels come off of existing or future charters Hess is obligated to reimburse the company in an amount equivalent to the projected market rates over the next five years.

The firm’s co-founder Doug Newhouse is even cited as saying “this transaction is for the patient investor.” Did he mean five years patient? He also said the deal’s structure would allow the firm to pay out LPs without going through a traditional exit, because the guaranteed cash flows, from either revenues or the seller agreement, would pay off the company’s debt within the first five years.  Did the firm use its guaranteed cash flows, from either revenues or the seller agreement, to pay down its debt within the five years, as it planned to? (Newhouse did not respond to an email requesting comment.)

The reasons cited for U.S. Shipping’s demise are pretty vague. The company cites a drop in demand thanks to recent market conditions and greater competition. Ironic that competition be the reason, since the award story also lauds the significant regulatory barriers to entry in U.S. Shipping’s industry.

But Sterling Investment Partners is not alone in this unfortunate trend. The bankruptcy is just another on the growing list of cursed award-winners.

  • In 2005, Bruckmann, Rosser, Sherrill & Co. won Mid-sized Deal of the Year for LazyDays RV Center. That company missed an interest payment in the fall and it’s been languishing on S&P’s Weakest Links list for months.
  • Even better, in 2006, Lehman Brothers won the now-dubious award for Large Market Lender of the year. The main reason it won is because it led the lending on the Mega-Deal of the Year: Hertz Corp.
  • Clayton Dubilier & Rice’s buyout of Hertz won was taken public less than a year after it claimed the title of “Mega-Deal of the Year,” with CD&R still owning a majority stake. The company reportedly took a loss in Q4 and initiated a $600 million cost cutting campaign. Hertz will take a hit if GM files for bankruptcy, which would allow GM to break car selling agreements that are beneficial to Hertz.
  • Also in 2006 (admittedly a year when everyone had buyout fever), TPG won Buyout firm of the year. Two years later, they’re the only mega-firm in the US that’s performed so poorly they allowed LPs to take their commitments back.
  • Loehmann’s, the discount retailer purchased by Arcapita (then Crescent Capital Investments), won small market deal of the year in 2005. One year later, the firm sold the company to sovereign investor Istithmar, when retail valuations were through the roof. Now the company is “on the brink of default,” according to Moody’s.

It’s not to say that the deals themselves weren’t impressive or even deserving, but to the dismay of deal pros, none of that matters if the exit doesn’t live up to the entrance. Because of that, two years ago, the Buyouts editors decided that the best way to truly and fairly recognize outstanding private equity performance would be to look at, among other factors, the cold hard exit numbers. It’s been working just fine so far (none of the award-winning exits from those cycles have gone bankrupt).  So, it seems the curse has been broken. Just stay from those magazine covers.