Sun Capital Sees Light At End Of Tunnel

Company I: K.K. Tarami

Seller: Sun Capital Partners

Buyer: Mitsubishi UFJ Lease & Finance Company Ltd.

Price: $49.3 million

Return: 16.4x

Fund: Sun Capital Partners IV LP

Company II: Timothy’s Coffees of the World

Seller: Sun Capital Partners

Buyer: Green Mountain Coffee Roasters, Inc.

Price: $157

Return: 5.25x

Fund: Sun Capital Partners V LP

After a year of absorbing body blows, Sun Capital Partners has finally taken the offensive. In recent weeks, the Boca Raton, Fla.-based firm scored two impressive exits and wrote up its portfolio. It’s even ready to do new deals.

The situation began brightening for Sun Capital in October, when it reported modest write-ups for the first half of 2009. Across its portfolio, the value of firm’s holdings increased by 3 percent, including an 8 percent write-up for its latest fund, Sun Capital Partners V LP, which experienced a year-end 2008 writedown of 60 percent. Also in October, Sun Capital earned back a little respect from investors when it allowed them to reduce commitments made to its $6 billion fifth fund by $1 billion.

In recent weeks the firm has also sold off two investments, earning respectable returns on each. On Nov. 13, Sun Capital announced the sale of Timothy’s Coffees of the World to Green Mountain Coffee Roasters Inc. for $157 million. Sun Capital purchased the specialty coffee supplier for $19.9 million in equity, and the sale represents a 5.25x cash-on-cash return and 186 percent IRR for the firm’s fifth fund.

In early December, Sun Capital closed its sale of K.K. Tarami, a Japanese maker of fruit gelatin products that was held in the firm’s fourth fund since 2007. The exit represented a 16.4x return on Sun Capital’s $3 million equity investment in the company and generated a gross IRR of 216 percent. The deal was Sun Capital’s first and latest in Asia.

In both instances, product innovation helped drive profitability and growth. In the case of Tarami, the company was unprofitable at the time of purchase. Through increasing productivity, introducing products and improving material sourcing, the company’s sales increased by 40 percent and EBITDA increased by 246 percent.

Now, after cutting $1.3 billion in operating costs since the fourth quarter of 2008, more of Sun Capital’s companies may be poised for sales as the market slowly recovers. Meanwhile, the firm is about to ramp up as a buyer. The firm plans to increase its deal activity next year, possibly to 2008 levels, when it did 23 deals. Sun Capital was much less active in 2009, purchasing fewer than 10 companies.

Scott Edwards, a principal with Sun Capital, said the firm does not believe the best time for distressed investing has passed.

“The best returns come not from investing early but more in the middle to end of the cycle,” he said, pointing out that it has become easier in recent months to value and understand what it takes to turn a company around. The firm’s outlook is positive, Edwards said. “I feel a lot better today than I did back in February,” he said. In addition to rising fund values and the two exits, the collective EBITDA of Sun Capital portfolio companies is rising and the portfolio is healthier “by every single metric,” including liquidity, covenants and operating statistics, he said.

That doesn’t mean Sun Capital is able to put the tough times behind it. The firm is concerned about unemployment numbers, as well as underemployment, which is as high as 17 percent, Edwards said. “That needs to get solved in order for us to see a real rebound,” he said.

The firm also continues to deal with the past two years of missteps, including 16 portfolio company bankruptcies, multiple rounds of layoffs, quite a few resignations and even a founding partner’s family drama. Moreover, Sun capital’s largest investment, Kellwood Co., remained valued at zero in the firm’s portfolio as of October, despite the fact that the apparel marketer was able to push back its debt maturities until 2014 through a bond exchange.