Gulag Blog

Back to (buyout) biz as usual

Reason #147 that nothing has changed: leveraged buyout private equity shops Carlyle and Hellman & Friedman are tapping the loan market to pay themselves dividends. From Pierre Paulden and Kristen Haunss at Bloomberg…

Carlyle Group, the world’s second-largest private-equity firm, and Hellman & Friedman LLC are seeking to take advantage of a record rally in high-yield, high-risk loans to take cash out of companies they bought last year amid the financial crisis.

Goodman Global Inc., a maker of air conditioner systems bought by Hellman & Friedman, has asked lenders to allow a payment of as much as $115 million to the private-equity firm. Booz Allen Hamilton Inc., the U.S. government-consulting company purchased by Washington-based Carlyle, is seeking a $350 million term loan to finance part of a $550 million payout to its owners, Marie Lerch, a Booz Allen spokeswoman, said last week.

PE can be a great gig. Get control of a company, take cash out, leave bondholders to clean up the mess when the company falls into bankruptcy. A recent example is Thomas H. Lee Partners buyout of Simmons:

For many of the [Simmons'] investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.

But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.

How so many people could make so much money on a company that has been driven into bankruptcy is a tale of these financial times and an example of a growing phenomenon in corporate America.

Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.

But the load weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of “Flip This House.”

Greed is good!

Tags: carlyle, dividend, hellman and friedman, leveraged buyout, private equity

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