Tuesday, November 30, 2010

Industry Thoughts | Turning the Other Cheek

Dan Primack of Fortune mentioned in a tweet a while back about a common tactic private equity executives use on journalists, service providers, and the curious public: "No comment." I wasn't sure what that was in regards to, but Dan was more specific in today's Term Sheet.

Trimaran Capital Partners, a firm with $1.6B under management, invests $25 to $100 million of equity in transactions ranging in value from under $100 million to $1 billion. They acquired Charlie Brown's from Castle Harlan in 2005, and out of nowhere, they laid off 2,000 employees. While I understand that there's an explanation for this, the fact that Trimaran's answer for Dan was "no comment" and that, on top of that answer, "someone else might choose to discuss the matter at a later date," is disturbing.

This situation reminded me of another food-related spat between a portfolio company and a private equity firm: Stella D'Oro. The firm sold the company to Lance Inc., who was aiming to close the Bronx plant and move operations to Ashland, Ohio. The union backing the workers fought back, but lost heavily and everyone lost their jobs. Only recently were the workers able to get some sort of success; Crain's reported that workers will get some money back in back pay and benefits. 

When it's highly confidential information, sure, I understand that you cannot share details. However, even a general answer is helpful, as in Dan's words, "private equity firms [...] also have a responsibility to company employees." It's a trust the firm violated.

Oh, and if you're reading this, Dan, according to Pitchbook, Bugaboo Creek Steakhouse has been on the block since July 2010 (Charlie Brown's hired Raymond James to seek strategic alternatives).

Sunday, November 28, 2010

Industry Thoughts | Del Monte and the Reunions

I'm already missing vacation. The Del Monte deal came in while I was museum hopping in Washington DC; I hope that you all had a restful and great Thanksgiving!

What a busy Thanksgiving weekend it's been!

First you have the J. Crew deal with TPG and Leonard Green for $3 billion, now you have KKR's, Vestar Capital's, and Centerview's deal to buy Del Monte Foods.

Now, as some publications have mentioned, this deal does not award the consortium with all the Del Monte divisions (such as the fresh fruits sector). However, the most powerful asset in the firm's arsenal IS included: the Pet Food division.
As DealBook explains, half of the company's revenue comes from its pet food division. 65% of EBITDA comes from the division of well. Strong and stable pet foods businesses are tough to come by (the most recent one was Irving Place Capital's acquisition of Pet Supplies Plus, and you also have KKR buying the British company Pets At Home), so this is a great move for the consortium. However, one other key piece in this transaction is that the alliance reunites executives with firms:

  • David Hooper at Centerview is an ex-Vestar Capital Partners guy; he is the top executive at Centerview with a private equity background
  • Many members of Centerview worked at Nabisco, which KKR used to own
  • Jim Kilts, the head of Centerview and former CEO of Gilette, also was in a high command at Nabisco (which, again, KKR owned)
  • KKR used to own Del Monte but spun it off after it acquired Nabisco
Private equity firms usually don't have an extensive amount of specific experience when it comes to their portfolio companies. However, with the powerful consumer goods experience amongst all 3 firms (and Centerview was probably getting itchy while sitting on a $500MM pile of cash for a while), it's in my opinion of the best deals done this decade.

Who's next? DealBook mentions a few firms like Smucker's and ConAgra, but one area I see getting busier that they mention are small private-label brands like Richlieu Foods (which Centerview bought from Brynwood Partners).
The valuation is amazing too (from DealBook):

Del Monte was trading at a low price-to-earnings ratio of under 10, was on track to realize $259.2 million in free cash flow for this year, and its pet food business, which featured brands like Meow Mix, was heavily undervalued.

The thing is, will we get another Del Monte-style deal? Not for a LONG time.

Wednesday, November 24, 2010

Industry Thoughts | The SBIC Move

Thanks to a small tip from PEHub, I learned that more and more buyout shops (including a prominent one, The Riverside Company) are applying to get capital through the Small Business Investment Company (SBIC) program. In my opinion, this is one of the greatest trends that private equity firms have been doing recently.

The mission of the SBIC, paraphrased from their website, is simple: provide strength to small business through private equity capital and funds from long term loans. The program's been around for some time (since 1953), and it provides a safe source of money for private equity firms to invest in significantly smaller rising stars among the small business world.

Curious about how much money in financing the program has raised? Here are links for FY2009, with this link for the summary of all financing.

I am close with one private equity firm that recently got capital to invest in some small businesses. Started by a bunch of ex-Liberty Partners executives, the firm targets $15-$75MM businesses with 20% EBITDA margins, with various industries. What is the most important characteristic to recognize, however, is learning how passionate executives at the firm are with working with smaller corporations (through SBIC). One of my contacts explained how useful it is to have another investment strategy but have a positive effect for the economy.

The SBIC program needs to be embraced more. It may not provide as powerful returns as other investments, but smaller private equity firms are in greater danger and less solvent, so by having access to a safe source of capital and helping small businesses grow, the industry can have a positive effect on the US economy.

Have a safe and wonderful Thanksgiving. Here's a link from one of my favorite nerdy websites; I don't know how many of you recognize the website, but major kudos to you if you do!

Tuesday, November 23, 2010

Industry Thoughts | After J. Crew

UPDATE I: I've added pieces on the J.Crew deal from various publications here. Enjoy articles from PEHub, the WSJ's Deal Journal, and all three DealBook pieces (so far).
UPDATE II: Thanks to Dan Primack at Fortune for finding this CNBC piece by John Carney on the relationship between TPG and J. Crew 

Wow, 2 posts in one day. I feel so productive.

...but the main reason I'm writing another is because of Andrew Ross Sorkin's DealBook piece on who's next after J.Crew. Paul Lujenez of Nomura lists Abercrombie & Fitch and Ross Stores as 2 top buyout places with Lululemon Athletica and Tiffany & Co. rounding out the list. Some quick big-picture thoughts on each:

  • Abercrombie: The company seems to keep bleeding cash. Case in point: watching countless tourists walk into the 5th Ave. store but few actually buy anything. It would make sense for a Leonard Green-style firm to take it over, it really needs help.
  • Ross: Well balanced, especially with more consumers moving towards the TJ Maxxes and Marshalls as their primary clothing places. Good call.
  • Lululemon: The company has nowhere to go but up. Simple business model, and the yoga trend won't die anytime soon, it actually has a chance to grow exponentially if it can be a more popular workout for people who are significantly overweight and are looking for a good and gradual entry to burning it off.
  • Tiffany: Not much room for growth/expansion. CEO Michael Kowalski has done a great job on the restructuring front.
One area I think would be great for buyout firms? Smaller, Europe-based firms (like Cath Kidston) that haven't expanded to the USA yet and have distinguished themselves from other specialty retail firms. I really can't think of any other retail firms that just seem attractive right now...

Industry Thoughts | A Major Win For J. Crew

It was only a matter of time.

J. Crew is potentially going to be taken private, this time by its old owner TPG and with some help from Leonard Green and CEO Millard "Mickey" Drexler. With DealBook getting the scoop, the specialty retail company is fetching around $2.8 billion with a share price of $43.50. The stock is soaring, hitting above $45.00. Yes, it's only been Day 1 of the announced deal, so talks could go awry...

...which is why I refer to DealBook reporter Michael de la Merced's piece on TPG getting a little selfish. By recutting the deal today, the private equity firm that once owned J. Crew and brought in Drexler may have actually pissed him off. There are a LOT of private equity firms out there that have strong backgrounds in retail, apparel, and specialty consumer items. 

Personally, I hope that Leonard Green gets a bigger stake (and say) in the deal. They are the first private equity firm that comes to mind which could work closely with Drexler to maintain the company's "rockstar" status ever since it was turned around from a failing preppy label (that I detested) to a fashion-forward affordable store chain (where, well, 50% of my wardrobe is now from). 

J. Crew pioneered the concept of "contracts, contracts, contracts." From Sperry and Red Wings to specialty jewelers, shirt companies, and even fabric brands, the company made basic clothing popular again and exposed general consumers to brands they would almost never consider going to their stores for. Add promotions, a talented set of executives, and creating specialty stores for menswear (J.Crew Men's), womenswear (Madewell) and now weddings, and you have a specialty retail firm playing like a high-end designer.

It'll be interesting to watch this deal unfold. Will Mickey look for another buyer? Can Leonard Green get more of their money's worth? We'll see...

UPDATE: The deal has been confirmed (thanks again to Mr. de la Merced). The go shop period is until Jan. 15th. I'm setting the over/under on competing bids at 2.

Monday, November 22, 2010

Industry Thoughts | The Power of Business Services (especially in the current market)

"Industry Thoughts," which will be posted every now and then, will be my 2 cents on sectors, companies, and deals within the private equity industry. They also may be about specific private equity firms. Comments are always welcome!

This morning, one of my contacts in the private equity world (a VP at a strong lower middle-market PE firm in Pennsylvania) posted this article about Human Resources being a core competency. I definitely agree, as I've seen a few private businesses try to outsource the service to 3rd party providers and, as Seth Levine put it, "forget about it". As I thought about it this morning, I started looking at the bigger picture, at Business Services in general.

The Business Services sector has done well in recent times, both regarding companies under the category and as a generally popular target for private equity (focusing on the USA right now). Margins are significantly better as operating expenses are obviously lower versus manufacturing-focused firms, but what makes it a better play now is that the supply of qualified men and women as assets for these service firms (from maintenance work to HR and staffing companies) is much more abundant. The only real necessary requirement for them is that if your firm has a good amount of free cash flow as backup in case if that supply starts to dwindle (which is actually good for the rest of us as that would mean the economy is turning around for the better).

Will this trend of private equity firms acquiring and restructuring Business Services firms last? With a 10% unemployment rate and millions of men and women who have given up searching, I'd say at least for 3-5 years.

Thursday, November 18, 2010

Conference Notes | The 2010 ACG Retail Conference

One thing I've been doing more often for my job is attending conferences to see how PE firms (clients, prospective ones, and other firms) are doing and what's been going on lately with them. When I go to a conference, I'll put some key takeaways in posts like this one. Enjoy!

On November 18th, the Association for Corporate Growth's New York Chapter hosted a Retail and Consumer industry-focused conference entitled "Retail/Consumer Dealmaking - The New Frontier." Located in the New York Athletic Club, it attracted multiple PE firms and service providers and had 2 panels, 1 dedicated to senior lenders and another for the private equity side. You can find the panel bios here.
It also had a great one-on-one lunch conversation with Rick Perkal of Irving Place Capital (formerly Bear Stearns Merchant Banking). It's nice to hear what Rick has to say as he's one of the few executives out there who's a blunt and straight-forward speaker about PE's involvement in the Retail industry, along with what Irving Place has been up to. They've been busy too; they closed 6 deals recently!

Some takeaways:

  • Retail is in a "periscoping" stage: Michael O'Hara of Consensus Advisors said that ther ewas less growth and inventory amongst retailers in 2008, and you saw more cleaving off of growth through store closures, layoffs, and restructuring. In 2010, retailers are popping their heads out, but are still pretty quiet in terms of growth.  It's almost a "quiet normalcy."
  • Inventory turnover is more important than ever: Tim Tobin of GE Capital mentioned that if retailers cannot sell a product, they will mark it down to a point that they can get rid of inventory ASAP to restock with new/successful products. Dana Telsey of Telsey Group also mentioned a "need for speed" regarding inventory turnover, and she listed multiple retail areas that have had different strategies, from outlet malls and big-box retailers to specialty retail stores like J.Crew.
  • "Newness" is key: Retail in general has low barriers to entry. How can retailers survive against the Wal-Marts and Targets of the world? Simple: distinguish yourself. Jeff Edelman of RSM McGladrey noted how consumers are going from "desperate to rational" and that while stores like TJ Maxx and Marshall's were not their first choices for clothes, it is now because of their product selection. Macy's and Bloomingdale's are also recognizing how to promote luxury and luxury-style brands and products to attract more customers, especially with the holiday season coming up. Ms. Telsey also mentioned "competitive newness," citing Aeropostale's $3 t-shirts and the onslaught of H&M, Zara, and Uniqlo as examples.
  • Middle-market growth is still tempered: Burt Feinberg of CIT Capital Finance listed EBITDA multiples of mid-market retailers ($10-$30MM EBITDA) at 2.5-3.5x, whereas large-cap ($100-$300MM EBITDA) is more around 5x. The middle market retail sector is going to grow much slower, but it again depends on how they can distinguish themselves from big-box competitors.
(If you have more questions about the conference, feel free to let me know in the Comments feed!)

Here's my take on PE (particularly middle market) and retail: 
  • While margins are much higher in the luxury goods space, it's much more dangerous as the target consumer is emotionally driven towards buying. In other words, they have the money to spend, but their emotions will only determine whether they're actually willing to  shell out a few hundred dollars for a pair of Louboutins, a Burberry trench, or a Tiffany's necklace. 
  • I agree with Dana on looking for middle-market specialty retailers that have an edge in terms of products they offer; this is why Hot Topic (the goth store) is still around, for example. 
  • Another area to consider is European small and mid-size brands like Cath Kidston that are slowly coming to the USA. Mall operators want to fill spaces, and the pop-up shop concept is growing (and even companies owned by Sun Capital Partners, as Aaron Wolfe said, are taking advantage of it).
Overall, it was a great conference. Kudos to ACG New York and the other sponsors (I can't remember them all, sorry!) that hosted the event. Plus, the food at the NYAC was pretty good!

Wednesday, November 17, 2010

Welcome | How it all started | A comment to the PEGCC

Welcome to my first post!
As I mentioned in my Twitter feed (over to the right of this post), I had been keeping a lot of my thoughts on private equity in general limited to 140 characters with links, and had toyed with the idea of putting more content into a blog. Well, the toying is over, and I offer you all this result.
Unlike the other great private equity journalists over at Fortune, PEHub, Dealbook, etc., I have an very different background that led up to my curiosity...

The year was 2007 and I was contemplating making my next move into the real world. I had the opportunity to go back into equity research, but a small firm was hiring and attracted me to apply for a job. A few months later, I happily received and accepted an offer, and 2 years later, here I am. 

The firm exposed me directly to the private equity industry and firms within it, as they are our main clients. During my first year, I heavily concentrated on project work, but while the analysis interested me, I grew more and more curious about the intertwining relationships within the industry, from deal flow to how firms determine industries and/or sub-sectors as the flavor of the months. With some general marketing experience under my belt, I then transitioned into a business development/marketing role, where I now handle activities for the firm, along with providing research and analysis.

As I read more and more articles from online and print publications, I started making my own observations about the industry, starting with the reputation it gets. When you compare it to the banking industry, private equity comes off as an old dog slowly getting used to the modern way of life. With only 1 real lobbying group (The Private Equity Growth Capital Council, formerly the Private Equity Council) behind the industry as a whole, the average reader only gets a snippet of how diverse the industry truly is. The growth of middle-market private equity activity, for example, gets masked by the Steve Schwarzmans and Henry Kravises, and while you see individual efforts by top executives like David Rubenstein to clear the air, it's not enough.

To the PEGCC if they ever see this: it's going to be a matter of time before the private equity industry comes under Congress's microscope again, and not just because of the carried interest debate. With so many dividend recap deals going on now combined with junk-rated loans set to expire in the next few years, there is only so much time to take a modern approach for a public relations effort. 

As I write more posts, I'll go more into some ideas on what firms and the industry can and should do, along with my takes on key deals going on, popular industries and sub-sectors, and private equity-focused conferences and panels. Please leave any comments, complaints, suggestions, etc. on the posts, as I am slowly getting more experienced in the blogging area of work.
On the more fun side, expect a set of posts called "You'd Never Expect It..." which I'll put a private equity-owned company that, well, I would never expect to be owned by PE! (I'll put my reason why, don't worry.) 
I'm not a journalist. I'm just someone who has been amazed by the private equity industry. The intelligence that goes behind the deals, the men and women on deal teams and operations teams, it all has left me in awe.