Need To Sell?

Culligan International Co. is currently undertaking a “re-franchising” process that could put Clayton Dubilier & Rice in a better position to exit the provider of water filtration services.

The firm bought the Rosemont, Ill.-based company back in 2004 for $610 million, with the New York-based buyout shop investing $170 million of equity, according to Buyouts archives. The investment came out of CD&R’s sixth buyout fund, a $3.5 billion vehicle it closed in 1999.

Culligan provides water treatment products and services for the household, commercial and industrial markets. In 2010, it generated net revenues of $640 million, according to Moody’s Investors Service. CD&R has already made about 2x its invested capital, thanks to at least one dividend recapitalization executed in 2007.

In March, Culligan announced plans to sell its company-owned dealerships in North America. The idea, according to a source close to CD&R, is to simplify its business model and return to the 76-year-old company’s roots as an owner of franchisee-run dealerships. The process should generate about $120 million in cash proceeds, the source said.

The company has sold other non-core assets as well over the last year, including a Canadian bottled water business for $5.4 million, a vended water business for $109 million and a U.K. bottled water and household equipment business for $8.7 million, according to Moody’s. The company is also shifting more operational focus to its European business, which is more profitable, according to Moody’s.

It’s unclear if the divestitures could help the company pay down substantial debt, much of which matures this year. This includes a $110 million revolver that matures in May and a roughly $542 million first lien term loan that matures in November, according to Moody’s.

In May, Moody’s downgraded the company’s corporate family rating and probability of default rating to Caa3 from Caa1, noting the company’s debt load of roughly 15x EBITDA (the source close to CD&R puts this figure at around 10x EBITDA) as well as “weakness in its operating performance and ongoing cash consumption.” As of Dec. 31, 2010, the company had a cash balance of about $55 million and about $86 million available from the $110 revolver, Moody’s noted. The company’s credit facilities do not have financial maintenance covenants, according to the report.

“Given the approaching debt maturities and an over-leveraged capital structure, Moody’s anticipates that a distressed exchange, bankruptcy or a payment default over the next eighteen months is possible,” the ratings agency wrote in its report.

Executives at CD&R declined to comment.