Target: PinnOak Resources LLC
Price: $600 million
Buyer: Cleveland-Cliffs Inc.
Seller: Questor Management
Financial Advisor: Seller: UBS, Morgan Stanley
Legal Advisor: Seller: Skadden, Arps, Slate, Meagher & Flom LLP
With roughly two years to go until the firm closes its doors for good, turnaround investment firm
On July 31, Questor closed the sale of coal producer PinnOak Resources LLC, generating at least a 26.5x return on its $11.5 million investment and an IRR north of 180 percent, according to a source familiar with the deal. The buyout shop sold PinnOak to Cleveland-Cliffs Inc., an international mining company with headquarters in Cleveland, for $600 million. Cleveland Cliffs paid $450 million in cash, a quarter of which was deferred until 2009, and assumed $150 million in debt.
It was a transaction that seemed blessed from the outset. The acquisition won this magazine’s “Small Market Deal of the Year” award for 2003 in large part because of a sale-leaseback arrangement that allowed Questor to buy two struggling coal mines for a song. Questor partnered with coal veteran Benjamin Statler to buy the mines from U.S. Steel in June 2003. They created PinnOak to manage the venture, with Statler serving as CEO.
The firm paid $67 million for the mines, only to sell them a week later in a sale-leaseback arrangement with Houston-based Natural Resource Partners for $58 million. PinnOak continued to operate the mines and collect revenues through the lease agreement with the new owner. All told, Questor’s initial equity stake in PinnOak totaled $11.5 million, according to Robert Denious, a Questor managing director who served on PinnOak’s board of directors and shepherded the deal through its life cycle.
The firm bought the mines with capital from the $860 million
Statler had been eyeing the mines for a few years, recognizing that—as the largest remaining contiguous reserves of low-volatility, high-quality metallurgical coal in the United States—they were undervalued. The mines, located in Pineville, W.Va. and near Birmingham, Ala., were also somewhat of a corporate orphan under U.S. Steel, which used the coal in its production of coke, a key component in steel manufacturing.
Questor held PinnOak for just over four years, during which time it increased performance by reworking the cost structure and streamlining operations, issuing dividends along the way. During the past few years, the price of the type of coal the mines produce has risen substantially, leading Questor to conclude that an exit now would allow it “to reap the full value on the strategic value of the asset,” Denious said.
Denious led the exit, with help from Questor Principal Michael Madden and Co-Managing Principal John Javitz, both of whom have since left the buyout shop. In 2005, Madden left with a small team to form
According to Questor’s Web site, Jay Alix and Lawrence Ramaekers remain as co-managing principals; Robert Shields serves as vice chairman; Albert Koch, Wallace Rueckel and Denious serve as managing directors. With no plans to raise a third fund, Questor’s goal for the next two years is to harvest its remaining portfolio, which includes AZ Automotive Corp., Chef Solutions, Polar Corp. and Teksid Aluminum.
Chef Solutions consisted of three businesses when Questor acquired it in 2004. Its bakery division was sold last year to Fresh Start Bakeries Inc., a
Alix and Dan Lufkin formed the Southfield, Mich.-based turnaround shop in 1995. After raising and investing two funds, the firm’s principals began leaving last year, signaling the shop’s inevitable close. In the meantime, though, Questor still has four companies left to sell, and one impressive exit to brag about.—J.P.