Private-equity firms bring duds to market

Leveraged-buyout offerings may not lure investors

Nov 8, 2009 @ 12:01 am

By Aaron Elstein

After a long hibernation, the lords of leveraged buyouts are up and about. Kohlberg Kravis Roberts & Co. finally went public last month after a two-year delay, while The Blackstone Group and Cerberus Capital Management LP unveiled plans to return to their favorite pastime: reaping fat profits from selling companies back to the public. If ever there was evidence that the markets are back, baby, this is it. Um, hang on. Sure, private-equity firms would like to please their investors and sell some of the stuff they paid top dollar for during the merger frenzy that ended two years ago. But for lots of good reasons, it doesn't look like the investing public is inclined to accommodate them. For proof, just look at last month's initial public offering by Dole Food Company Inc. (DOLE). Dole was owned by a single large investor who took a page from the leveraged-buyout playbook and piled debt on the purveyor of fresh pineapples and canned peaches. In fact, Dole's debt was more than four times its earnings before interest, taxes and other expenses. The interest costs alone ate up a third of operating earnings last year. Little wonder that a lot of investors thought this initial public offering smelled funny. Dole hoped to raise $500 million but ultimately had to cut the offering price and settle for $446 million. The stock quickly sank below the opening $12.50 a share and late last week was hovering at $12. Dole is just the biggest private-equity-backed IPO to turn into a bust. RailAmerica Inc. (RA), a freight transporter owned by Fortress Investment Group LLC, has sunk 20% since its IPO last month — after its bankers, too, cut the price in order to move the deal. One reason for the crummy reception: Debt service ate up nearly 60% of RailAmerica's operating earnings in the first half. IPO proceeds had to be used primarily to pay down debt. Let's hope the next leveraged-buyout-backed IPOs do better. The sellers would surely be happy to have the cash.

• Cerberus. This firm could use some good news; right now, it's the poster child for private equity gone wrong. After building a reputation under managing member Stephen Feinberg for deftly investing in distressed firms, Cerberus -suffered huge losses due to the spectacularly ill-timed acquisitions of Chrysler Group LLC and consumer-finance arm GMAC Financial Services. Investors reacted by yanking $5 billion out of Cerberus. In September, the firm said it would ban withdrawals from new funds for three years.

Now Cerberus is offering in-vestors a shot at an intriguing IPO: gun maker Freedom Group. The firm comes with some pockmarks: Interest expenses were six times higher last year than when it was purchased in 2006, for instance. Still, those costs amount to just 22% of operating income, so there could be some breathing room even if gun and ammunition sales decline.

• KKR. The renowned firm took a big loss late last month with the bankruptcy filing of Capmark Financial Group Inc., a commercial-real-estate lender spun off from GMAC. KKR's own recent public offering likely wasn't what co-founders Henry Kravis and George Roberts had in mind, either. Rather than list their shares on the New York Stock Exchange and partake in the opening-bell ceremonies, the partners quietly took their firm public in Amsterdam.

Now KKR is peddling a chance to buy Dollar General Corp., the nation's largest discount retailer. While the company is reporting strong same-store-sales growth, it also carries a hefty long-term-debt load of more than $4 billion. Much of that debt is variable-rate, so Dollar General could be seriously squeezed if interest rates rise.

• Blackstone. Stephen Schwar-z- man and his crew are struggling to refinance their $27 billion top-of-the-market acquisition of what is now Hilton Worldwide, so Blackstone is offering investors a few novelty items from its stockroom. Its looking to unload Merlin Entertainments Group Ltd., owner of Legoland theme parks and the Madame Tussauds wax museums. The stock could make a perfect Christmas gift.

Hopefully, the shares will fare better than Blackstone's. Since the company went public in the summer of 2007, Blackstone's stock price has fallen by more than half.

Aaron Elstein is a senior reporter for sister publication Crain's New York Business.

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