Transportation, Distribution & Logistics

BEHIND THE NEWS: Private equity players may be primping firms for IPOs

May 7, 2007

It's an age-old strategy: A private equity firm buys a company, bolsters its performance, then pockets a tidy profit by taking it public or selling it outright.

Los Angeles-based Freeman Spogli & Co., the majority owner of Hhgregg Inc. the past two years, last month revealed plans for a $170 million initial public offering for the consumer electronics retailer.

You can be sure other private equity firms that have scooped up local companies in recent years have the same exit strategy in mind, though they're not showing their cards at this point.

Let's throw out a couple of local names, anyway: Marsh Supermarkets Inc. and Global Aero Logistics Inc., known until recently as ATA Holdings Corp.

To be sure, Marsh is a long way from being an enticing initial public offering candidate. Its profits were woefully small before Boca Raton, Fla.-based Sun Capital Partners purchased the grocer last fall for $88 million, plus the assumption of $237 million in debt.

The folks who run the investment firm fashion themselves as retail wizards of sorts. As Sun wrote in a letter to Marsh last spring, "Sun's track record as a private equity firm focused on operational turnarounds is second to none, particularly in the retail sector." If Sun can work its magic on Marsh, it might collect a big payday down the pike.

The turnaround of Global Aero-and the opportunity for its majority owner, New York-based Matlin-Patterson Global Advisers, to capitalize-appears within reach.

In a bold expansion, the company this spring announced plans to buy Atlanta-based rival World Air Holdings for $315 million.

It's been a long time since the former ATA has had the financial wherewithal to be on the acquisition trail. The airline, which landed in bankruptcy court in October 2004, lost more than $1.2 billion in the three years ending in December 2005.

Since emerging from bankruptcy in February 2006, it's fared better, losing $36 million on revenue of $637 million in the final 10 months of the year, according to a new Securities and Exchange Commission filing.

At one point in the filing, Global Aero says, "We may sell shares of our common stock in public offerings." At another, the company says its bylaws stipulate how existing investors would

be treated in the event of an initial public offering.

Private equity firms often have myriad options to exit an investment-especially if they can show profit swelled under their watch. On that score, many of the nation's top private equity firms have a sterling record in recent years.

Consider, for instance, what's transpired at locally based Aearo Technologies, a maker of earplugs and other protective gear.

The British private equity firm Permira bought Aearo a year ago for $765 million-twice what the seller, New Yorkbased Bear Stearns, paid for the company in 2004.

The Permira deal marked the third time Aearo had been bought by a private equity firm since Boston-based Cabot Corp. spun out the division more than a decade ago.

So far, it's not looking as though Permira overpaid. Since the deal closed, "Aearo has continued to perform extremely well," company CEO Michael McLain said last week, with operating profit up about 20 percent.

Fighting for Hat World

It's hard to imagine now, but way back in 1999, the private equity firm that controlled locally based Hat World wanted to take the company public, but couldn't find enough investors.

The big problem: It was the height of the dot-com era. Bricks-and-mortar retailers drew yawns from investors. Ultimately, South Dakota-based Bluestem Capital yanked the $6.4 million offering.

Today, Hat World, now a unit of Tennessee-based Genesco Inc., is back in fashion. In fact, analysts say Hat World is a big reason New York-based Foot Locker last month offered more than $1.2 billion to buy Genesco.

"Genesco's Hat World is a great business, and it's one that Foot Locker would probably love to have," Christopher Kampe, an investment banker with Grant Thornton LLP in Boston, told Mergers & Acquisitions Report. Hat World accounts for about 23 percent of sales for Genesco, which also owns Journeys and other chains.

While Genesco swiftly rejected Foot Locker's $46-a-share offer, investors are betting that's not the end of the story. Genesco shares on May 2 hit an all-time high of $51.16-a sign they believe Foot Locker or another suitor will emerge with a higher offer.
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