Last month Code Hennessy & Simmons (CHS) agreed to buy AMF Bowling Worldwide. The public-to-private deal calls for CHS to pay $25 for each common share of AMF stock, for a total of approximately $660 million, including debt. The transaction is expected to close in the first quarter of 2004.
That the deal was agreed to on Thanksgiving could serve as a positive omen for CHS, as “turkey” in bowling-speak generally refers to three straight strikes. However, for investors in the past, AMF has proven to be a difficult investment, with frequent stops in bankruptcy protection that left a lot of red ink on the investors’ balance sheets. The latest to feel the bite was a Goldman Sachs Capital Partners-led investment group, which paid $1.4 billion for AMF in 1996 only to see it file for bankruptcy in 2001 after a massive expansion spree.
A team of Farallon Capital Management, Oaktree Capital Management, Angelo Gordon & Co. and Satellite Asset Management helped pull the company out of bankruptcy in March 2002, and with the sale to CHS, look to be some of the first investors to exit AMF with a profit. The consortium bought out the bank debt, which had a face value of $620 million. Speculation in the press indicated the group paid around $0.80 on the dollar for the stake, equating to a just-under $500 million price tag. In turn the group forgave the debt and received a 92.5 percent equity stake.
For the CHS deal, the $25-per-share purchase price puts a $307.5 million valuation on the AMF stock, and the firm will assume $352.5 million worth of company debt. While the details of the financing arrangement have not been finalized, CHS Founding Partner Brian Simmons said it will consist of “a combination of public and private securities,” with Merrill Lynch and Credit Suisse First Boston tapped to lead the debt component.
While the company’s past struggles did not dissuade CHS from pursuing the transaction, its did cause CHS to place a large focus on the due diligence. “Anytime you’re looking at a property with a checkered past, you have to be twice as careful as to knowing what went wrong and why,” Simmons said. “We spent a lot of time with industry specialists and other experts to understand the trends and how they effect the business in order to ensure accuracy in projecting the outlook.”
AMF, with 490 bowling centers worldwide, is the largest operator of its kind. The company got into trouble when it pursued its expansion under GS Capital Partners, but since its bankruptcy, AMF has turned around its performance through cuts in management and a dedication to improving its existing operations rather than expanding into new areas.
In addition to bowling centers, AMF maintains a market in the resale of bowling equipment, and also manufactures of billiard tables. However, Simmons said, “This investment was exclusively driven by the opportunity we see in the bowling centers,” which make up more than 80% of the company’s revenue.
In describing the appeal of AMF, Simmons cited first the company’s established brand name, and to grow AMF, CHS will primarily focus on building that brand. “AMF is somewhere between a distribution business and a services business…There’s almost a restaurant component to it, and the opportunities are certainly attractive relative to the price,” said Simmons.
The price, at $660 million, is less than the $665 million the AMF assets were valued at upon its emergence from bankruptcy. It is also below the $680 million Hicks, Muse, Tate & Furst reportedly offered for the company earlier this year before it withdrew from the deal.
In discussing other draws, Simmons said the real estate portfolio of AMF was another attractive component the firm considered, and noted that CHS would be open to looking at a possible sale/leaseback of the properties to help boost liquidity.
Since emerging from bankruptcy protection, AMF has been on a sustained roll, having generated 10 consecutive quarters of positive EBITDA, and for the full-year 2002 reported $115 million in EBITDA on $669 million in revenue. And if AMF continues to have the pins fall its way, CHS may be in line to find that elusive “turkey” investors have been looking for.