Exit Breathes Life Into Fenway Partners

Target: 1-800 Contacts

Price: $900 million

Buyer: WellPoint Inc.

Seller: Fenway Partners

Financial Adviser: Seller: Sonenshine Partners LLC

Legal Adviser: Seller: Ropes & Gray LLP

The New York-based firm announced on June 4 it had agreed to sell the retailer of contact lenses and glasses to health insurer WellPoint Inc.; terms weren’t released, though the sources confirmed the sale was for about $900 million.

Fenway Partners should generate around 4x its invested capital and generate a net internal rate of return of more than 30 percent on the deal, which is expected to close in the third quarter, according to the sources. The firm invested about $120 million when it led a take-private of the company in 2007. Since then, the company’s revenue has grown by more than 70 percent, EBITDA has more than doubled and the number of employees has increased, according to the sources, who declined to provide specific numbers.

Under Fenway, the company revamped its Web site to enhance online shopping and entered into a partnership with Wal-Mart, among other accomplishments, the sources said.

Such a return would be welcome news for the 18-year-old firm, which not long ago was considered a marquee mid-market buyout shop.

Fenway raised $702 million for its third and most recent fund in 2007, earmarked for buyouts of companies in the consumer branded products, transportation, logistics and specialty distribution industries. But a series of challenged investments have been a drag on the portfolio. The fund has generated an investment multiple of 0.78x and an internal rate of return of -7.3 percent as of Dec. 31 for the Oregon Public Employees Retirement Fund, which considers it a 2006 vintage fund.

Meanwhile, a number of investment professionals have parted ways with the firm. It’s a struggle many mid-market firms have faced since the downturn that followed the buyout boom of 2005 through 2007, including MidOcean Partners and Ripplewood Holdings.

But the firm’s two core founders along with a pair of senior executives have remained in place, and they believe that Fund III could ultimately prove profitable. They are in the process of trying to exit another portfolio company, one of the sources said. Fenway has stopped investing in transportation, a target sector that produced several bad investments, and is now mostly focused on the branded consumer product sector, a fact that the firm hammered home in its press release announcing the sale of 1-800 Contacts.

“Fenway has a long track record of successfully investing in and building branded consumer products companies, including Easton-Bell Sports and American Achievement as well as a prior successful investment in the luxury brand, Harry Winston,” Peter Lamm, a co-founder of the firm, noted in the release announcing the 1-800 Contacts exit.

Once the sale of 1-800 Contacts closes, the firm will have returned half of Fund III to its investors, one of the sources said.

Fenway will have nine companies in its portfolio from its second and third funds once the sale of 1-800 Contacts closes.