by David Carey | Published March 23, 2012 at 9:34 AM
Private equity firm Vestar Capital Partners will walk away with a small gain on an 8-year-old investment in plastic cup maker Solo Cup Co.
On Wednesday, Solo announced it would be sold to privately held Dart Container Corp. for $1 billion in cash. The figure includes close to $700 million of Solo debt and a smidgen more than $300 million in equity value.
The latter has plummeted by more than half since 2004, when Vestar injected $216 million in Lake Forest, Ill.-based Solo to help fund the company's $900 million acquisition of rival SF Holding Group Inc., Sweetheart Cup's parent. The PE firm bought preferred convertible into a one-third common stock stake. The family of Solo founder Leo J. Hulseman retained control.
The bet behind the Sweetheart deal was that Solo could slash duplicative costs, boost margins and gain clout in an industry plagued by slow growth, pricing pressures and declining margins.
But its troubles didn't abate. Early on, Solo struggled to integrate Sweetheart into its operations. Customers such as Wal-Mart Stores Inc. and Target Corp. squeezed suppliers harder on prices. Later on, the recession took a huge bite out of sales.
Starting in 2007, Vestar and Solo's management moved to cut costs; they shut three of Solo's 13 North American factories, unloaded unprofitable operations and slashed more than $300 million in long-term debt.
Yet the overhaul failed to offset the impact of weak sales, which fell from a peak of $2.1 billion in 2007 to $1.6 billion in the 12 months ended Sept. 26, 2011. For two years running Solo has recorded operating losses.
Notwithstanding a sharp erosion in Solo's equity value, Vestar will record a $38 million, or 18%, gain on its 2004 investment, a source familiar with the matter said.
That's the result of its status as a preferred stock owner. Over time, Vestar has racked up unpaid dividends on its preferred at a rate of 10% a year -- dividends that have a superior claim to the Hulsemans' common.
Despite being a two-thirds owner, the Hulsemans will collect less than $60 million in the sale to Dart, versus $254 million for Vestar.
Vestar declined to comment.
No doubt, Vestar knew from the outset it faced tough odds turning the business into a winner.