JLL Realizes Partial Exit, Readies For M&A With Warburg –


Firms: JLL Partners and Warburg Pincus

Target: Builders FirstSource Inc.

Price: $200 million each

Legal Counsel: Warburg: Willkie Farr & Gallagher; JLL:

Skadden, Arps, Slate, Meagher & Flom

Fairness Opinion: JLL Fund V was advised by UBS; JLL’s

Funds II and III were advised by Deutsche Bank

JLL Partners has had a few busy months and its recent deal with Warburg Pincus to unload half of its stake in Builders FirstSource Inc. demonstrates the strategy JLL was pitching to its LPs when it was fundraising last year-long-term time horizons.

JLL has been building Builders FirstSource since 1998, and eight years down the line still isn’t ready to give it up fully.

JLL will sell half of its stake to Warburg Pincus. Warburg and JLL are each putting up $200 million and paying $23 per share. The structure of the deal went like this: Warburg Pincus bought 26.2% of JLL’s stake using Warburg’s $8 billion Private Equity IX, while JLL’s fund V bought out the other 26.2% owned by JLL Funds II and III, giving liquidity to those earlier funds.

For JLL’s Fund II, which invested $128 million, the IRR is 21%, while for Fund III, which invested $100 million, it is $26.5%. Both funds made 3.5x on invested capital. Both invested at the same price, but since Fund II was invested longer, its IRR was lower.

Dallas-based Builders FirstSource operates in 11 states, mostly in the Southern and Eastern U.S., and makes products such as roof and floor trusses, wall panels, stairs and windows.

In the 1990s, the $150 billion building supply industry was constituted largely of mom-and-pop shops, with only one company having more than $1 billion in sales at the time JLL began its investment, said JLL Partner Ramsey Frank. JLL bought its platform in 1998 out of Pulte Homes, for $75 million. The company at that time had $250 million in sales and $15 million in EBITDA. Over the next three years, JLL made 21 add-ons to build up sales to $1.5 billion and make the business the third largest in the industry.

Today the business has $2.3 billion in revenues and, in 80% of its markets, is the top player. It went public this summer and since then it has performed well, hitting as high as $26.10 after opening in the teens.

JLL still sees big things for the business, which will now be returning to its M&A strategy after a few years of internal growth. In the next few years, if consolidation continues, there could be a $10-billion-in-sales supplier, and “we hope to be right up there with them,” said Frank.

Paul Levy, a founder and senior managing director of JLL, remarked that longer-term horizons like the one JLL is exhibiting with Builders FirstSource seems to be a growing trend. As opposed to a quick flip, “I’d rather have a 15% compounded for 20 years,” said Levy.

This kind of strategy was part of how JLL tried to sell itself to investors in 2005, when it was raising Fund V, which closed on $1.5 billion in December. JLL’s Fund IV raised $750 million.

During fundraising, JLL told LPs, which include Harvard, Yale and Stanford, as well as New York State Teachers, that it shuns two things that can be prevalent among LBO shops: short time horizons and big debt loads. JLL’s Jeffrey Lightcap said the firm generally will not lever its companies above 4.5x. Builders FirstSource is a good example-it currently has about 1.7x in leverage.

Out of the current fund, JLL will look to make 10 or 11 investments at about $125 million per deal. With the new girth of the fund, JLL is trying to bring on new staff at the vice president and associate level, but Levy admits it’s hard, especially when competing against hedge funds for the same talent.

As reported in Buyouts, JLL originally attempted to exit Builders FirstSource in 2004, when it hired UBS and Deustche Bank to auction the company. Home Depot was interested and prepared to offer between 7x and 8x EBITDA, which would have valued the company at up to $900 million and give JLL a 3x return. But JLL opted for the IPO instead, with UBS and Deutsche Bank as underwriters.

JLL was founded in 1988 and has managed over $4 billion in its history. Current investments include Motor Coach Industries, New World Pasta and IASIS Healthcare.