Buyout shops wade into bankruptcy deals

Buyout shops that don’t ordinarily invest in distressed companies have been lured into the stormier side of the market by what they see as fundamentally good companies struggling with too much debt.

For example, On May 20, Charlesbank Capital Partners bought TLCVision, a provider of eye care services, out of bankruptcy. The Boston-based shop teamed up on the deal with H.I.G. Capital, a firm known for distressed investing, which held debt in the company.

Elsewhere, executives at The Blackstone Group, which has invested in distressed companies in the past but is not known as a pure distressed player, are reportedly considering joining a consortium led by Brookfield Asset Management to acquire shopping mall owner General Growth Properties out of bankruptcy.

Francisco Partners, a San Francisco-based firm, on May 15 outbid a number of distressed players, including Hale Capital Partners, with an all-equity agreement to buy EF Johnson Technologies, a maker of wireless radios and other wireless communications products that has battled slumping sales in recent years.

Vincent Tang, a senior investment analyst at Hale Capital, said the firm has been bumping into other plain-vanilla buyout shops more often in recent months.

“Unless we’re willing to overpay, it’s very difficult for us to do anything,” he said. “It’s hard to beat someone who’s doing a buyout with no financing contingency. We can’t compete with that.”

Eric Malchow, a managing director at Lincoln International, said the trend stems from a decline in opportunities to buy clean, growing companies at buyer-friendly prices, coupled with the desire to put capital to work after an exceptionally static 2008 and 2009.

Because buyout shops have a lot of dry powder, they have the ability to outbid distressed players with all-equity bids, as Francisco Partners did with EF Johnson, then refinance down the road or even flip the company to another buyer in 12 to 18 months.

Charlesbank Capital had bid unsuccessfully on a few distressed companies in the past, and TLCVision marks the first troubled company it has bought. The company has three areas of business: laser eye surgery, mobile cataract equipment and rental services, and a cooperative that allows optometrists to buy equipment at discounts.

Brandon White, a managing director at Charlesbank Capital, said that the firm had contacted management about a possible deal before the company declared bankruptcy. He said the firm believes TLCVision has good growth prospects marred by too much debt on the balance sheet. In 2009, he said, the company generated EBITDA of $25 million to $30 million, but had about $107 million of debt on its balance sheet, plus about $6 million to $9 million of annual capital expenditures.

Its lenders weren’t convinced the company’s performance had bottomed out and so refused to refinance its debt. TLCVision has substantially less debt now, White said.

“What we saw was an industry that had declined substantially, where we think there’s opportunity to bounce back, and we didn’t have to pay much for that business,” he said.

Charlesbank Capital is actively looking for other deals with similar dynamics, and expects to continue the search for some time as more companies seek extra equity and more LBO debt matures.

“It’s absolutely something we’re looking at,” White said.

Executives at Francisco Partners and Blackstone Group did not return requests for comment.