Financing In Hand, Lehman Lands Deal

Target: Angelica Corp.

Price: $210 million

Sponsor: Lehman Brothers Merchant Banking Partners

Seller: Steel Partners

Financial Adviser: Seller: Morgan Joseph & Co. Inc.

Legal Adviser: Sponsor: White & Case LLP; Seller: Stinson Morrison Hecker LLP

Lehman Brothers Merchant Banking Partners recently won a deal even though a competitor was offering at least 50 cents more per share for the target company because Lehman Brothers managed to secure financing for the acquisition. The deal underscores how important it is for buyout shops to have financing commitments in place, now that banks are much more cautious about lending.

The buyout arm of Lehman Brothers agreed to purchase Angelica Corp., a St. Louis-based company that provides laundry services to the health care market. Lehman Brothers Merchant Banking will pay shareholders $22 per share in the $210 million deal, representing a 34 percent premium over the average closing share price for the 30 calendar days ending May 22. It is expected to close in late summer.

While a competitor was offering more money, that buyer couldn’t come up with financing in time, said Peter LaFleche, managing director at Morgan Joseph & Co. Inc., which advised Angelica Corp. He declined to name the spurned suitor. More than 100 investors looked at the company, LaFleche said.

Regions Bank and Regions Business Capital Corporation committed senior debt, and Apollo Investment Corp. committed mezzanine debt. In all, the company will be levered just under 7x last year’s $36 million in EBITDA.

It took Lehman Brothers Merchant Banking about three weeks to secure the financing commitments, said Li Zhang, a principal. Lehman Brothers Merchant Banking perhaps had an advantage over its competitors because of its history with the lenders. Regions Bank had financed previous Lehman Brothers Merchant Banking deals, and Apollo Investment Corp. had worked with Jon Mattson, a managing director at Lehman Brothers Merchant Banking who helped lead the deal, in 2004 when Mattson was at Investcorp and that firm bought Thomson Media from Thomson Corp. (Thomson Corp., now known as Thomson Reuters, publishes Buyouts.)

Also critical in the deal was that the Lehman Brothers team got support from Steel Partners, a hedge fund that held an 18 percent stake in the company and had been pushing the company to sell itself. “What you don’t want to do is have a wedge between the board and a major shareholder,” said Charlie Ayres, global head of Lehman Brothers Merchant Banking.

Lehman Brothers Merchant Banking was attracted to the company because of its non-cyclical revenue stream. “I can’t think of a business that is more recession-proof than this kind of a business, where people will need to be serviced in health care facilities and clearly sheets will need to be changed,” Ayres said.

As part of its research of the company, Lehman Brothers Merchant Banking hired Bain Consulting, which made some 300 calls to Angelica customers, said Zhang. The firm’s detailed survey gave it an edge, said LaFleche, of Morgan Joseph. “Lehman did some very [detailed] due diligence here that I think gave them added insight into the business that other firms didn’t get,” he said.

Lehman Brothers Merchant Banking expects to commit $135 million in equity from its $3.3 billion fourth fund, closed in July 2007. Upon completing the Angelica deal, it will have invested between $300 million and $400 million of that fund, leaving about $2.9 billion in dry powder.—B.V.