Wal-Mart Poses Threat To LBOs –

While Huron Capital Partners LLC has enjoyed overall success despite the weak economy, driving significant earnings growth in most of its portfolio companies and healthy returns for its LPs, one of its smaller investments has run into a big problem that is growing ever more prevalent in the economy and making private equity professionals think twice before entering some industries.

Huron thought it had seen the light after its $17 million deal to acquire Riverside Book & Bible House and its subsidiary, World Bible Publishers, in March 2001. The $5 billion dollar Christian products sector was only growing as a stumbling economy, combined with subsequent terrorist attacks in New York and Washington, inspired people across the nation to turn to religion .

Eventually, Huron’s acquisitions morphed into a portfolio company called Riverside Distributors that served independent, “mom-and-pop” retailers along the Bible Belt and beyond by distributing Christian products, mainly Bibles and other books, from producers.

“We benefited greatly in terms of significantly increasing Bible sales,” said Brian Demkowicz, a managing partner and co-founder with Huron, “but what happened is, we awoke a sleeping giant.”

Suddenly, Wal-Mart announced that it would be the biggest seller of Christian products in the country. It, and other national retail chains like Costco Wholesale Co. and Borders Group Inc., realized there was a bigger market there than they previously thought, and they allocated additional shelf space for it. With their market clout, giant retail chains, like Wal-Mart, are able to buy Christian books directly from the publisher. The end result is a lower retail price than stores could offer through Riverside.

“We never played that game, because we knew we couldn’t compete-that wasn’t our market,” said Demkowicz. “It truly was a market shift, really, which we knew was ongoing, but we thought it was a longer time-frame.”

Now, Riverside is restructuring to avoid bankruptcy, and Huron is evaluating a number of options to exit the investment, including selling the company or repositioning it as an online player.

“The jury is not out yet, but everybody in the industry is feeling the same pain,” said Demkowicz.

The Christian products sector is not the only industry feeling the squeeze from the growing power of multinational retail behemoths like Wal-Mart. The new paradigm that they bring to different retail markets has wreaked havoc on more traditional sellers, like grocery stores, clothing stores, toy stores and many more. The presence of Wal-Mart is one of the first things that private equity dealers are considering when evaluating an investment, and Bain Capital recently saw Wal-Mart’s effect on its Kay Bee Toy Store investment, which went bankrupt.

While Huron’s foray into the Christian products industry has been a disappointment, Riverside is the only one of nine companies purchased by the firm in the last three years that is underperforming. It sold Prism Enterprises, a medical products company, in May 2003, generating an IRR in excess of 30% for investors. Also, it invested more than $20 million over the last 18 months, closing four transactions. Most recently, the firm acquired Miami Jacobs College, an add-on to its education platform, Delta Education.

Based on its success, Huron will begin raising a new fund later this year, and Demkowicz said the firm will be vigilant in avoiding pitfalls of the past. “Like many private equity funds whose portfolio companies have been impacted by big box retailers, we tend to shy away from investments where Wal-Mart has a significant presence in the distribution chain,” he said.