Not to say there weren't success stories. Many buyout shops, including Bain Capital LLC, Apollo Management LP, Madison Dearborn Partners LLC, TPG Capital and Warburg Pincus
-- and lest we forget the smartest money of all, Warren Buffett -- can
all lay claim to successful PIPEs at some point. Some of the most
successful ones during the tech bubble were fairly small investments of
under $500 million. JLL Partners Inc.'s (then Joseph Littlejohn
& Levy) $150 million investment in prescription drug company
Advance PCS Inc. was among the blockbuster wins, yielding net proceeds
of $1 billion, or a 591.7% internal rate of return.
Recent events haven't changed the mixed reviews. Absent leveraged
financing, the staple of leveraged buyouts, some PE shops have taken to
PIPEs as an alternative way of deploying capital. This year to date
featured an astonishing $180 billion worth of PIPEs, according to
PlacementTracker, a unit of Sagient Research Systems Inc.,
which has followed PIPEs since the mid-'90s. Of that, sponsors invested
about $19.1 billion, or 11%, compared with just $3.4 billion of last
year's $84 billion total.
Understandably, interest has flagged of late. TPG Capital's $1.35
billion loss from Washington Mutual Inc., the failed savings and loan
that J.P. Morgan Chase & Co. scooped up in September,
showed just how treacherous the markets can be, though TPG said it had
not foreseen the magnitude of the financial crisis nor its profound
global impact.
Corsair Capital LLC fared better, breaking even on its $785 million investment in National City Corp.,
its first foray in a U.S. commercial bank. Not so for other private
investors in the $7 billion capital raising by Cleveland's Nat City,
which Pittsburgh's PNC Financial Services Group Inc. took over in October.
Likewise, other bailout PIPEs by private equity firms are under
water, though the jury remains out. Warburg Pincus' $800 million in
bond insurer MBIA Inc. is now worth about 50% less on paper. Others, including Wilbur Ross' $250 million outlay in bond insurer Assured Guaranty Ltd. and Thomas H. Lee Partners and Goldman, Sachs & Co.'s $1.2 billion commitment in equity and debt to MoneyGram International Inc., have taken even bigger hits.
Still, the love-hate relationship with PIPEs continues. Braving the markets, Los Angeles buyout firm Leonard Green & Partners LP is injecting $425 million for a 17% equity interest in Whole Foods Market Inc.
The Austin, Texas, natural foods store operator has faced mounting
difficulties. Its stock has lost about 75% of its value this year amid
the specter of a deepening recession and an apparent decline in
Americans' appetite for upscale, pricey food. An aggressive expansion
plan, including the $700 million merger with Wild Oats Markets Inc.
agreed upon last year, along with proposals to open an additional 66
stores in the next four years, hasn't helped.
Leonard Green declined comment.
Whole Foods posted net income of $1.5 million, or 1 cent a share, in
the 12 weeks ended Sept. 28. That compares with a net profit of $33.9
million, or 24 cents a share, in the same period last year. The
earnings decline was attributed to negative comparable store sales,
reduced margins due to customers trading down and Whole Foods'
inability to pass along cost increases. For the fiscal year ended Sept.
28, the company posted $114.5 million in net income on $7.95 billion in
sales.
Leonard Green will get newly issued preferred convertibles into
common at $14.50 a share. The conversion price on the preferred is 41%
above Whole Foods' $10.31 closing price on Nov. 5 at the time of the
announcement.
Its convertibles will pay an 8% dividend, in cash or in kind at
Whole Foods' option. And the dividend will drop to 6% after three years
if Whole Foods stock closes at or above $17.75 a share for 20
consecutive trading days.
As with recent PIPEs, it's too early to say how Leonard Green's bet
will perform. But the news was met with a tepid response, with the
stock gaining only 17 cents on the announcement. Shares were trading at
$9.20 as of Nov. 12.
Whole Foods chairman and CEO John Mackey gained points for boosting
liquidity. "The cash infusion is good," says Edward Henderson, a senior
analyst at Moody's Investors Service. Whole Foods also cut some
expansion plans and terminated leases. Before the capital infusion,
Whole Foods' stock had lost about half its value in October on
analysts' concerns over the company's lack of liquidity.
But Moody's qualified its view, downgrading Whole Foods' probability
of default and senior secured bank loan ratings to Ba3, from Ba2.
Moody's also warned about a further downgrade if earnings continue to
decline and leverage rises incrementally.
"We're reviewing it because it isn't clear if the liquidity will be sufficient to address the company's needs," Henderson said.
While Whole Foods' $350 million in debt is relatively small, Moody's
said the 6.5 times debt-to-Ebitda multiple is high and could rise, as
the weakening economy continues to pressure earnings.
Credit Suisse Group analyst Edward Kelly said Whole Foods
alleviated liquidity concerns, but the investment, coming at a costly
5.3 times Ebitda ratio, provided further evidence that the company has
"serious cyclical and structural issues." The combination of aggressive
organic growth at diminishing returns, the highly questionable
acquisition of Wild Oats, severe consumer weakness, and poor liquidity
management has finally forced the company to raise additional capital,
Kelley's research concludes. "The stock's fundamental outlook remains
poor," the report said.
All this may not bode well for Leonard Green. But the firm boasts a
successful history in retail, profiting from bets on Kash n' Karry Food
Stores Inc., now Sweetbay Supermarket, Jack in the Box Inc., and more recently in flower seller FTD Group Inc., which returned 2.2 times its cost. The firm also doubled its money in drug retailer Rite Aid Corp., its only other PIPE investment in its nearly 20-year history.
If nothing else, this latest PIPE signals that companies previously
reluctant to sell stock in the hopes that financing markets will open
up are now truly feeling the pinch.
Whole Foods' example shows that there are those that just can't afford to wait out the storm.
-- David Carey contributed to this article.
| Tip of the iceberg? |
| Top PE-backed public investments in private entities, 2008 YTD |
Date |
Target/
Description |
Target
nation |
Financial sponsor |
Sponsor
nation |
Deal value ($mill.) |
8/4/08 |
Asciano Group
Industrials |
Australia |
Asciano Group SPV |
U.S. |
$7,231.4 |
5/7/08 |
Clearwire Corp.
High technology |
U.S. |
Investor Group |
U.S. |
3,200.0 |
6/27/08 |
NDS Group plc
High technology |
U.K. |
Permira Advisers LLP |
U.K. |
2,861.1 |
2/22/08 |
CHC Helicopter Corp.
Energy and power |
Canada |
First Reserve Corp. |
U.S. |
2,217.4 |
2/25/08 |
Getty Images Inc.
Media and entertainment |
U.S. |
Hellman & Friedman LLC |
U.S. |
2,017.7 |
4/8/08 |
Washington Mutual Inc.
Financials |
U.S. |
TPG Capital LP |
U.S. |
2,000.0 |
4/16/08 |
Hypo Real Estate Holding AG
Financials |
Germany |
HRE Investment Holdings LP |
Cayman Islands |
1,796.4 |
4/11/08 |
TriZetto Group Inc.
High technology |
U.S. |
Apax Partners Worldwide LLP |
U.K. |
1,601.5 |
2/14/08 |
Migros Turk Ticaret AS
Retail |
Turkey |
Migros Turk Ticaret AS SPV |
U.K. |
1,599.9 |
1/14/08 |
Bright Horizons Family Solutions
Consumer products and services |
U.S. |
Bain Capital LLC |
U.S. |
1,327.3 |
1/14/08 |
Legg Mason Inc.
Financials |
U.S. |
Kohlberg Kravis Roberts & Co. |
U.S. |
1,250.0 |
2/14/08 |
Migros Turk Ticaret AS
Retail |
Turkey |
Migros Turk Ticaret AS SPV |
U.K. |
1,044.6 |
4/21/08 |
National City Corp.
Financials |
U.S. |
Corsair Capital Management LLC |
U.S. |
985.0 |
2/14/08 |
Scorpion Offshore Ltd.
Energy and power |
Bermuda |
Fortune Super Equity Management LLC |
United Arab Emirates |
798.8 |
1/16/08 |
MoneyGram International Inc.
Financials |
U.S. |
Investor Group |
U.S. |
760.0 |
4/18/08 |
Thornburg Mortgage Inc.
Financials |
U.S. |
MatlinPatterson Global |
U.S. |
696.4 |
4/21/08 |
Saxon Energy Services Inc.
Energy and power |
Canada |
Sword Canada Acquisition Corp. |
U.S. |
686.8 |
2/19/08 |
Ducati Motor Holding SpA
Industrials |
Italy |
Ducati Motor Holding SpA SPV |
Italy |
601.8 |
6/7/08 |
Unisteel Technology Ltd.
Industrials |
Singapore |
Latch Holding (Labuan) Ltd. |
Singapore |
555.7 |
1/30/08 |
NuCO2 Inc.
Materials |
U.S. |
Aurora Capital Group |
U.S. |
471.9 |
11/5/08 |
Whole Foods Market Inc.
Retail |
U.S. |
Leonard Green & Partners LP |
U.S. |
425.0 |
2/4/08 |
EON Capital Bhd.
Financials |
Malaysia |
Primus Pacific Partners Ltd. |
Hong Kong |
412.0 |
|
