Firm: Blue Wolf Capital
Target: Hospital Laundry Systems, Inc.
Entry Price: $28.3 Million (Nov. 2008)
Exit Price: $48 Million (March 2011)
Investment Returns: 3.9x on Invested Capital With 95% IRR
Advisers: Duff & Phelps (Inv. Banking); Patton Boggs (Legal)
The world was in financial and economic chaos back in November, 2008, just two months after Lehman Brothers evaporated and AIG and other financial firms were rescued by hundreds of billions of dollars in public money. The auto industry, too, was on the brink of collapse, and millions of people flocked to the polls, eager to elect a president who would save America from Apocalypse.
It wasn’t a time when most firms wanted to do deals.
Yet Blue Wolf Capital did. Its agreement to buy Hospital Laundry Systems for $28.3 million that month, despite the near desertification of the credit markets, turned out to be one of the most prescient and profitable moves that this private equity firm—or any private equity firm for that matter—has made in the past decade.
The decision to do the deal, despite the panic in the general economy, was based on a simple premise: No matter how bad things got, hospitals and health clinics would always need clean sheets. Although health care laundry service wasn’t the most glamorous business, it was a stable and captive market, especially considering that the sellers of the company were some of the very same hospitals that would need those clean sheets.
But under the company’s ownership by a consortium of 11 non-profit Chicago hospitals, something was amiss. Despite having state-of-the-art facilities, the operation was plagued by inefficiencies and complicated union contracts. According to Blue Wolf, the company had no focus on profits, no knowledge of the competitive marketplace, and uncompetitive work rules from multiple labor agreements. Things were so bad that the unions and the hospitals that owned the firm were worried about the company’s very survival.
That was prime territory for Blue Wolf, whose mantra, according to its co-founder Adam Blumenthal, has been to “take troubled organizations and make them better and do so in a responsible way.”
Because Blue Wolf had experience working with unions—this deal was actually introduced to it by one of the company’s largest unions—Blue Wolf embraced the possibility of buying a firm that most private equity executives would have viewed as weighted-down by union issues they didn’t understand.
And given the company’s precarious health, said Blumenthal, “the unions believed that our ownership of the company would increase the (job) security of their members,” adding, “we presented a much more attractive vision of the future.”
Blue Wolf was founded in 2005 to take advantage of situations where government and labor unions were part of the value chain, factors that most mid-market firms have tended to shy away from. “We want to find the kind of situations that people are passing over,” said Blumenthal. “Most firms see these kinds of companies, throw up their hands, and say ‘yuck.’”
The New York-based firm has 11 investment professionals and is currently investing Blue Wolf Capital Fund II LP, which raised $118 million in 2008 and is 60 percent invested. According to data from the New York City Teachers’ Retirement System, one of Blue Wolf’s investors, Fund II has delivered an IRR of 20 percent along with a 1.3 return multiple, as of Sept. 30, 2011.
In late 2008, as negotiations to buy Hospital Laundry Systems were progressing and new plans and strategies were being developed for the company, the credit markets were quickly drying up. Going ahead with the deal would entail creative ways to raise funds. In the end, Blue Wolf was able to raise most of the financing without bank debt, relying instead on vender financing, seller financing and a sale lease-back agreement on the main laundry facility.
Ultimately, the deal got done using $9.3 million in Blue Wolf equity plus $19 million in debt. “Our sellers and vendors all wanted the transactions to close,” said Blumenthal. “Everybody believed that they would be better off if the transaction happened.”
Fast forward to March 2011 when Blue Wolf sold Hospital Laundry Services to Crothall Services Group, a hospital-services firm, for $48 million. In less than two and a half years, Hospital Laundry Systems had been transformed into one of the largest providers of health care laundry services in North America, serving 770 hospitals and clinics in the Chicago area. Over that same period, Blue Wolf more than doubled EBITDA to $8.4 billion from $4.1 million (including $1.5 million from a bolt-on acquisition). About 60 percent of HLS’s growth came from increased sales, while the rest came from increased efficiency.
The sale also gave Blue Wolf a 3.9x cash-on-cash return on its equity investment and a very impressive 95 percent internal rate of return.
So how did Blue Wolf do it? According to Blumenthal, there were three elements: working closely with the firm’s initial sellers to develop long-term customer relationships, renegotiating multiple labor agreements to streamline work rules, and changing the company’s culture to make sure that there was a strong focus on profits, revenue growth and market share.
“The issues that the company faced,” said Blumenthal, “tended to complicate what was actually an uncomplicated business. When we removed all these complications, we removed the barriers to this business being successful.”
And that success wasn’t limited to increased profitability. Among Blue Wolf’s successes was the firm’s increasingly efficient use of natural resources. Since the process of cleaning laundry consumes substantial amounts of energy and water, the firm invested in a water recycling system that helped it reduce water usage by 20 percent. In addition, the firm increased its energy efficiency by 9 percent.
Perhaps most impressive, however, was that Blue Wolf transformed a company that was at risk of failing into a company that actually expanded its unionized workforce from 300 union employees to 450, a 50 percent increase. Said Blumenthal: “One of the reasons we are successful is that we treat people whose priorities are different from ours with respect.”
Why Blue Wolf Won:
- Delivered very strong returns during an unusually short (28-month) ownership period. The investment returned a 3.9x cash-on-cash return multiple and a 95 percent IRR
- Daringly bought the company in the middle of the financial crisis and came up with innovative ways to raise capital despite frozen credit markets
- More than doubled EBITDA, mostly through sales growth and increased efficiency
- Created 150 new union jobs (a 50 percent increase) over two-and-a-half year period
- Implemented programs to more efficiently use water and power