CVC walks away from Jal

Private equity professionals have long paid lip service to how portfolio companies need to respond to cheap imports from China. For CVC Capital Partners and investee company Jal Group, that threat has now become a reality, however.

Jal called in turnaround experts AlixPartners in April 2004 to address cost pressures from Chinese imports. According to AlixPartners, the new owners of the company include Bank of America and Goldman Sachs, as well as US-based Mellon and a further four or so distressed specialists. It is understood from sources close to the deal that these new owners will probably invest new money in Jal.

The Bank of America and Goldman-led consortium acquired Jal’s debt at below face value in the spring and negotiated a debt-for-equity swap as part of a broader financial and operational restructuring. The move also saw the departure of company chief executive and minority shareholder Franco Uzzeni.

CVC confirmed it was no longer a shareholder in Jal but declined to comment on the size of its loss. It is, nevertheless, still on plan to hit its €6bn (US$7.2bn) fundraising target in the summer, according to sources close to the company. The fundraising follows a series of successful exits, including Kwik-Fit, the UK-based car repair and servicing company that was sold to French rival PAI Partners on June 24. (See boxed item.)

Jal was the result of a buy and build policy that began in June 1998, when CVC acquired French protective footwear manufacturer Groupe Jallatte from Fineter. At that point, the company had annual sales of US$93m.

CVC acquired Almar, a safety boot making operating in Spain and Italy, in August 2000 and merged the business to form Jal. Royal Bank of Scotland and Citigroup arranged €145.7m of senior and €39m of mezzanine debt to finance the deal.

Jal’s leverage levels at that time were seen as modest, with senior debt to earnings at 2.2x and total debt at 3.3x. The company has increased its market share in Europe from 25% to 30% since the merger but is understood to have suffered falling earnings and has reportedly broken its covenants several times since 2002. Its 2003 turnover was US$248m, although its other financial results were not disclosed.

Jal reported annual Ebitda of €13m in April, which would just cover the interest payments on its outstanding debt position of €120m in senior loans and €45m in mezzanine debt. Stefano Aversa, the Milan-based managing director of AlixPartners who helped to lead the turnaround, declined to comment on how much debt Jal would have after its refinancing. He said the move would take the company’s ratio “back to safe levels and industry norms”, however.

“The company has never been insolvent but did become overleveraged from the series of buyouts and mergers it went through, although in 2000 the prospective economy was very different,” Aversa said.

As part of the recovery plan, Jal is expected to shake up its pan-European sales network and bring out products using new materials. Aversa said the company would continue to cover all market segments including the low-end, which is most at threat from Chinese imports.

Chinese shoe imports increased by 700% in the first four months of 2005 compared with the same period a year earlier, after import restrictions were lifted. The European Commission launched an anti-shoe dumping investigation in June.