While most people in December were wrapping up their last-minute holiday shopping, Fox Paine & Co. went on the offensive to unload a portion of its portfolio. The San Francisco-based firm closed the sale of its United American Energy Holdings Corp. to DLJ Merchant Banking Partners and floated its United National Group platform in an IPO on the Nasdaq exchange.
In the UAE deal, first reported by Buyouts in October, the firm received an aggregate sale consideration of $215 million, representing a more than 2.8 times return on its original $75 million investment, which came out of Fund I. The investment also carried an IRR of about 25% for the five years Fox Paine held onto the company.
Saul Fox, the CEO of Fox Paine, noted that to drive the returns, the firm had to take the unusual step of delevering UAE when it acquired the business. “UAE was a reverse LBO,” he said. “We thought they were overlevered, so we suggested that they take our $75 million investment and repay their high-cost debt. After that we put in an acquisition facility and completed five acquisitions.”
Prior to the cash infusion, Fox noted that UAE had been unable to pursue add-on deals, as its creditors would no longer issue the company debt. Following the investment, though, UAE completed $850 million worth of acquisitions, which came alongside $1.6 billion in financings that were part of the roll-up.
“We were able to triple the electric generating capacity of the company, and quadrupled the cash flow, at a time when other guys in the same industry were going belly up,” Fox said.
The Public Appeal
While it took Fox Paine over five years to realize any returns from the UAE transaction, the firm was much quicker to cash in on its United National investment, having acquired the business just this past September. In the deal, Fox Paine paid $240 million for the specialty insurance provider. Through the floatation, which came a little over three months from the purchase, the firm was able raise $190 million, including a green shoe, $100 million of which was immediately returned to Fox Paine’s limited partners.
“In order to secure this deal with the terms we were able to negotiate, we had to give the seller a guarantee of closing by the late summer [of 2003],” Fox said. “We couldn’t put in a financing contingency, so we closed the deal and underwrote the entire price with our fund, with the understanding we could go out to co-investors and sell down the equity.”
However, as summer turned to fall, Fox recognized that comparable companies on the public market were up over 30% at the time, and the combination of that and strong profits at United National pushed the firm toward an IPO as the preferred financing source. Through the offering, which occurred on Dec. 16, a day after the UAE sale, Fox Paine sold 9.75 million class A common shares at $17.00 a share, and today the stock is trading at $18.45 per share (as of press time).
“We were able to do the IPO at just about two times what we paid for United National,” Fox said. “We took out $100 million and got that back to our LPs, and we still own about 53% of the equity. Plus, the IPO structured our voting rights at 10 to one.”
While the firm was quick to take United National to the public market, the firm will likely hold onto its stake for some time to come. “We still intend to be long-term investors [in United National]. We just used the public market as a financing vehicle,” Fox said.