Hicks, Muse, Tate & Furst is neither abandoning Latin America nor closing its New York office, contrary to recent rumors, said Dan Blanks, a partner at the firm. But the news still isn’t all good for the Dallas-based group.
It has cut its target twice now for Latin America Fund II, from an original $1 billion, to $500 million a year ago, and to $200 million “at best” today, Blanks said.
“It’s just impossible to raise capital right now,” said Blanks. “We’ve steadily scaled back our expectations.”
But the Buenos Aires office remains open, and long-term, Hicks Muse remains dedicated to the region. The fund, which is currently 60% invested, will continue to focus on the media and food sectors.
Blanks explained that rather than close the New York office, six investment professionals remain, including those who work on Latin America, although for a while, the office will not have a partner. Michael Levitt resigned as the New York-based partner this month.
Though Levitt is widely credited with leading the firm into telecom, a move that proved disastrous for Hicks Muse over the last 18 months as three of its PIPE targets went bankrupt, Blanks said Levitt was no more responsible than any of the other partners. Blanks applauded Levitt for work on some of the firm’s most successful deals in more traditional sectors. For example, he led the recent buyout of pickle-maker Vlasic Foods International Inc.
Blanks said the real reason for Levitt’s resignation was that “he didn’t want to move to Dallas.” Hicks Muse has recently made an effort to focus on its Dallas and London offices, keeping New York as a satellite office without a partner, and this strategy did not fit well with Levitt’s life plan. Levitt could not be reached for comment.
Levitt’s departure is not the only one for Hicks Muse this quarter. Principal Cesar Baez and associate Tadd Chessen, both of the Latin American team, have also left the firm.
Blanks attributed the “right-sizing” of the investment team to the size of the now smaller Latin American fund and the firm’s more narrow focus on deal flow through its Dallas and London offices.
Regarding Latin America, Blanks said the staff cuts “simply mean we were overstaffed. We [initially] staffed up to work on Fund II with a dedicated team of six or seven people, complemented by three partners,” and that was too many.
In lieu of these changes, Hicks Muse has promoted two principals to partner – Peter Brodsky in Dallas and Lyndon Lea in London – bringing the total number of partners at the firm, minus Levitt, to eight. Hicks Muse also announced that it intends to expand to 12 partners in the not-so-distant future.
Regarding its Latin America outlook more generally, Blanks said, “For what it’s worth, we’re very optimistic about the region long-term.”
For now, however, like most investors in the region, the firm is laying low and focusing on its existing holdings, particularly Pan American Sports Network.
The “laying low” is due in part to the Argentinean debt crisis. Like everyone with investments in Argentina, Hicks Muse has been rocked by the situation there. Though pan-regional, one-third of the firm’s Fund I is dedicated to Argentina.
In other news, Hicks Muse portfolio company Rhythms NetConnections Inc., under pressure from bondholders, has filed for Chapter 11 bankruptcy-court protection. This comes on the heels of other bad news in the telecommunications sector for Hicks Muse.
In May, the firm sold its stake in failing telecommunications companies Teligent and ICG Communications. At the time, IDT Corp. agreed to increase its stake in Teligent to 37% from 33.7%, and increase its interest in ICG to 42% from 33.3%, in exchange for shares of the company’s Series B convertible stock.
Hicks Muse originally invested $750 million, along with Liberty Media and Gleacher Capital, in ICG Communications in February 2000. At the time, company shares were valued at $28 each. Nine months later, in November, ICG was de-listed from the Nasdaq and filed for Chapter 11 bankruptcy protection.
Teligent’s share price was even higher when Hicks Muse and Microsoft co-invested $500 million in the company in May 1999. The company was valued at $57.50 per share. Hicks Muse eventually wrote down by 50% its $200 million investment, and Teligent was also de-listed and filed for Chapter 11.
For its part, Rhythms has tumbled from a share price of about $75 per share at its peak in mid-1999 to being de-listed from the Nasdaq at the end of May, less than two years later. Hicks Muse invested $250 million in Rhythms in March last year.