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Sale may extricate Harlan Labs from its debt problems

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Greg Andrews

The owner of Indianapolis-based Harlan Laboratories, the world’s second-biggest provider of lab animals, might be on the verge of deploying its escape chute.

San Francisco-based Genstar Capital is exploring selling the 2,600-employee company in the wake of failing early this year to renegotiate the company’s massive debt load.

“That has been rumored in the marketplace,” Standard & Poor’s analyst Shannan Murphy told IBJ. She said the approach makes sense given that Genstar would be looking for an exit strategy after owning Harlan for eight years and given that it is “increasingly unlikely” Harlan will be able to refinance $280 million in debt when it comes due in July 2014.

Parties directly involved are mum. CEO Hans Thunem “has no comment at this time,” according to an email from his assistant. Chief Financial Officer Doug Vaughan and a spokesman for Genstar did not respond to messages.

The debt hangover stems from Genstar’s 2005 leveraged buyout of Harlan. The playbook of private equity firms is to boost the cash flow of firms they acquire, giving them the wherewithal to shrink debt over time.

But the strategy runs aground if a business sputters, as Harlan now is, according to the rating agencies that track its debt. S&P said in a report that Harlan has experienced “double-digit revenue contraction” after sales reached $326 million in 2012.

Analysts say Harlan’s problem is not its lab animal business, which is relatively stable and historically has accounted for about half its revenue. It’s the other half of the business, contract research, an intensely competitive segment where Harlan is losing market share to larger, better-capitalized players.

Murphy said Harlan specializes in the earliest stages of research, a segment that turned soft when drug companies reined in spending and focused on drugs that were closest to reaching the market. While some contract research providers are beginning to see a rebound, Harlan is not.

S&P says some of Harlan’s problems are self-inflicted.

“The company has experienced several operational missteps over the past few years that cause us to assess management and governance as weak,” the agency said pointedly in a September report.

What becomes of the 82-year-old company could have big implications locally. Harlan employs about 330 people in the area, spread between its Allison Pointe headquarters and an outpost in Cumberland.

The next big hurdle for Harlan comes in mid-November, when the company will report to its lender group whether it remains in compliance with the covenants on its borrowing agreement. S&P said that because of weak performance, the company likely will find itself in violation, though the lending group may grant a waiver that averts a default.

It was never supposed to get to this point for Harlan. Things were looking up as recently as February, when the company appeared on the verge of pulling off a $305 million refinancing. But the deal fell apart and was shelved in April, S&P reported.

Rough holidays for retailers?

Retailers are masters at finding excuses for poor performance. If the weather is too warm, shoppers shy away from sweaters. If it’s too snowy and cold, they stay cooped up at home instead of flocking to malls.

But if this holiday season proves a disappointment, they’ll have some hard numbers to cite.

Zacks Investment Research notes that in 2013, there will be only 25 days between Black Friday and Christmas, compared with 31 last year. Perhaps even worse, there are just four full weekends in that span in 2013, compared to five in 2012.

Retail experts might be more upbeat if the economy were humming. But economists say growth remains sluggish, and continued high unemployment and underemployment are sapping buying power.

Purdue University retailing professor Richard Feinberg is predicting that holiday sales this year will be flat to down 5 percent from the previous year. Data compiled by ShpperTrak paints a slightly brighter picture, with retail sales rising 2.4 percent.

During a conference call with analysts Oct. 25, Simon Property Group Inc. CEO David Simon said, “Generally, September was a pretty bad month in terms of traffic and sales for all retailers.” While Simon said his company is seeing that October is better, “clearly, clearly the economy has slowed.”

Of course, all this isn’t necessarily bad news for consumers planning a shopping spree this Christmas. If retailers become anxious, they may pull the trigger on deep price cuts early, fearing they’ll otherwise enter 2014 with a glut of inventory.•

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