BARBARIANS AT THE MALL
Sep 1, 2006 12:00 PM, By Elaine Misonzhnik
Like the old LBO crowd, these investors look to make above-average returns usually in the range of 15 percent to 20 percent annually by unlocking hidden value. By removing companies from the glare of the public market and the demands for consistent quarterly profit growth by shareholders, these investors (in theory) can more easily undertake massive restructurings and pursue whole new strategies. They usually have relatively long-range time horizons of about five to seven years for turning businesses around, before selling them.
The top private-equity players certainly look like patient capital compared to hedge funds. According to Bank of America, hedge funds typically hold assets for only 10 to 18 months, betting more often on changes in market valuations or asset sales, rather than operational improvements.
Retailers are closely monitoring Sears Holdings, the combination of Kmart and Sears engineered by hedge fund ESL Investments, to see how this rare hedge fund deal in their industry plays out. So far, ESL and Sears Holdings Chairman Eddie Lampert has focused on operations and contrary to expectatations has not cashed in on the chains' highly appreciated real estate assets
The industry is also watching the private-equity firms that pop up again and again in retail deals Bain Capital, Texas Pacific, Warburg Pincus, Blackstone Group, Sun Capital Partners and others. They all have long track records in buying retailers, holding on for a few years, building up profitability and getting out by taking the retailers public or selling to another investor.
Texas Pacific and Leonard Green, the team that just struck a deal to purchase PETCO, have already proven their skills with the same company. In October of 2000, they bought the pet-supply store for $600 million, at a time when its annual revenues were $990.3 million. When they took it public, with a valuation of more than $1 billion, in 2002, revenues were up to $1.3 billion. And when Texas Pacific and Leonard Green sold the last of their stock in 2004, annual sales hit $1.65 billion, an overall increase of 67 percent. With PETCO once more feeling the squeeze from rival PetsMart and discounters Wal-Mart and Costco the investors are looking for a repeat performance.
Former Target subsidiary Mervyns has rallied under private ownership. When Sun Capital Partners, Cerberus Capital Management and Lubert-Adler and Klaff Partners bought the mid-market department store chain for $1.2 billion in July 2004, it was widely believed investors were interested primarily in its real estate. The firms did close more than 60 underperforming stores, but they also brought in Vanessa J. Castagna, formerly of JCPenney and Wal-Mart, as chairman. Castagna has broadened product selection, brought in more private labels and expanded profitable departments in an attempt to put the retailer back on track.
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