Snacking Shananigans? Willis Stein vs. Brynwood –

There was a time when the rapport between opposing buyout shops was icy at best. Today that doesn’t work. The propensity of sponsor-to-sponsor transactions, not to mention club deals, has dictated that firms need to at least appear affable in order to avoid being shut out.

However, the lawsuit Willis Stein & Partners levied against Brynwood Partners demonstrates that even in today’s sometimes chummy LBO market, animus still exists.

The suit, filed in November, involves the late-February acquisition of Lincoln Snacks Holding Co. by Willis Stein. The firm asserts that Brynwood knowingly misrepresented Lincoln’s financial performance and “stuffed” the company’s “three largest and most important customers with surplus inventory” in order to bolster the company’s performance on paper.

Additionally, the lawsuit claims, the defendants denied “certain due diligence prior to the closing of the transaction so as to conceal from the buyer the defendants’ misrepresentations.” As a result of Brynwood’s alleged “malfeasance,” the lawsuit states that Willis Stein has sustained losses in excess of $20 million.

Specifically, the grievance identifies that prior to the sale of Lincoln, the company choked up the distribution channels through selling “excessive” amounts of Lincoln’s “Just the Nuts” product to Wal-Mart and Target. That, in turn, led the two retailers to “materially reduce” their purchases of “Just the Nuts” in 2004. Additionally, the complaint states that early last year, Wal-Mart, Target and other retailers either started returning excess inventory, pursuing further markdowns or simply ceased buying new product until the inventory was cleared out.

Bad Timing

The timing of the lawsuit for Brynwood Partners could not come at a worse time. The firm is in the midst of raising a new $250 million-plus vehicle, Brynwood Partners V, L.P., and accusations of fraud, whether true or not, never sit well with LPs.

“It’s part of our standard due diligence. We check into all litigation and legal issues, and to the extent that they’ve been found guilty of fraud, yeah, that would be a big issue for us,” said one limited partner, who is not an investor with Brynwood. “The allegation of fraud is something that we would have to take a hard look at,” although the source noted it would not be an automatic dealbreaker.

Peter Coll, a lawyer at Orrick, Herrington & Sutcliffe, the law firm representing Brynwood, said, “The timing of the lawsuit is suspicious. Willis Stein knew Brynwood was fundraising and tried to take advantage of that.”

Additionally, aside from how this looks to limited partners, there is the question about whether this complaint casts Brynwood in a bad light from the perspective of other private equity firms. Such a characterization could serve to blackball a firm or at least force other firms to look more closely before doing a sponsor-to-sponsor transaction.

But not everybody is quick to throw stones. “It’s possible that Brynwood is being held accountable for a bad management team here,” said a managing director at another private equity firm.

However, the fact that Hendrik Hartong III, the son and namesake of Brynwood’s founding partner, Hendrik Hartong, Jr., was the CEO of the company prior to the sale, and then joined Brynwood as a managing partner following the exit, does not support a possible plea of ignorance.

With that said, few feel Willis Stein is without blame here. Private equity, usually considered the smart money when it comes to dealmaking, has often prided itself on being able to sniff out irregularities. The Blackstone Group, for example, reportedly cut the legs out from under Parmalat when the firm smelled something sour.

A partner from Willis Stein, in a March interview with Buyouts, even cited the “great relationships with their customers” as a plus for Lincoln.

Calls to Brynwood and Kirkland & Ellis, the law firm representing Willis Stein, were not returned by press time. Willis Stein, meanwhile, issued a statement confirming the lawsuit and describing the seller’s conduct as “clearly inappropriate.”

Brynwood’s lawyer, Coll, indicated the firm will file a motion to dismiss the lawsuit no later than Jan. 7.