Samsonite Bags Recapitalization

Luggage giant Samsonite Corp. reached out to a consortium of buyout shops for an investment, as the company continues to restructure amid a downturn in the travel industry. Ares Corporate Opportunities Fund LP, Bain Capital Europe and Teachers’ Merchant Bank, the private equity arm of Ontario Teachers’ Pension Plan, all took part in the recapitalization, the proceeds of which Samsonite will use for working capital and to repay debt. The deal is expected to close by the end of July.

The investor group will purchase 106,000 shares of a new series of Samsonite’s convertible preferred stock with an initial dividend rate of 8% for $106 million. Also, upon the closing of the recapitalization, Samsonite’s existing senior credit facility will be replaced with a new $60 million revolving credit facility. As part of the recap, the company will retire all of its 281,131 outstanding shares of 13-7/8% senior redeemable exchangeable preferred stock, in exchange for a combination of up to 54,000 of new preferred stock and roughly 205 million shares of common stock.

Samsonite first announced the receipt of the recapitalization proposal in February. Of the investors, only Ares has an existing equity ownership in Samsonite. According to Jim Leech, a senior vice president at Teachers’, each party contributed a little more than $35 million in equity toward the recapitalization, which together represents a 42% stake in Samsonite. With the addition of Ares’ existing stake, the buying group’s interest will be “up in the mid-50% range,” he said, adding that Samsonite will stay on the public markets following the investment. “This is a great company with a very bad balance sheet, and our investment will allow management to focus on management…They have been working with an axe over their head [in the form of] too much leverage,” Leech says.

As of October 2002, Samsonite had roughly $431 million in debt, and its stock, which in March 1997 was as high as $50.125 a share, now rests at approximately $0.40 a share.

Much like its products, Samsonite has had to show resiliency as the travel industry has taken the luggage company on a bumpy ride. The travel space continues to reel from the impact of the Sept. 11 terrorist attacks, the war with Iraq and most recently the SARS (severe acute respiratory syndrome) outbreak. “These guys have increased their margins despite this,” Leech noted.

To do that, Samsonite has diversified its products and decreased its reliance on the travel-necessitating luggage market. The company currently has two luggage brands, Samsonite and American Tourister, and also operates the Hedgren brand of women’s handbags and accessories and the Black Label line of men’s fashion accessories. The company has also made a number of difficult cuts, including layoffs at its Denver and Nogales, Mexico plants.

In the latest earnings release, Samsonite reported $744 million in revenue for the year ended Jan. 31, 2003, with adjusted EBITDA of $91.4 million. Those results represent a jump from the prior year’s corresponding period, when Samsonite reported $736 million in revenues and $70.2 million in adjusted EBITDA. The recap will lower Samsonite’s total leverage by roughly $90 million, and will cut its annual debt service costs and interest payments by approximately $5 million annually.

This is not Samsonite’s first infusion of private equity money. Apollo Management and Artemis Group, the investment vehicle of Francois Pinault, each had a 30% stake in the company up until the end of last year. In December 2002, Apollo sold all of its common shares. Artemis, meanwhile, will see its stake diluted down to the 1% range, according to Richard Wiley, the chief financial officer at Samsonite.

Samsonite had originally been in discussions with Artemis, which owns a controlling stake in Gucci Group, about an alternative financing arrangement. However, in October 2002, Artemis got cold feet and walked away from a proposal to invest another $100 million to $125 million of new equity into the luggage maker. The speculation surrounding Artemis’ decision to walk away points to concerns that if the French firm made the additional investment, it would not have been able to stick to its commitment to buy the 46% of Gucci that it does not already own.

The latest deal is still subject to a number of conditions, including the receipt of approval from a majority of the company’s outstanding common stockholders and outstanding preferred stockholders, as well as governmental and other third-party approvals. Samsonite expects the transaction to close by July 31, although the timing is dependent on an SEC review.

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