Does financial engineering always pay for Private Equity?
Despite the optics, yes.
As Dan Primack writes today:
When a company goes public, its initial success or failure often is gauged by comparing where its IPO priced against its proposed pricing range. So when crafts retailer Michaels Stores came in at the low end of its $17-$19 range last night, the immediate impulse was to view Michaels as a disappointment. In fact, someone said to me: “Bain and Blackstone can’t be too happy about this.”
Bain and Blackstone, of course, are the two private equity firms that originally took Michaels Stores private in the summer of 2006 for approximately $6 billion (existing investor Highfields Capital rolled over a small minority stake).
So here is what “not too happy” means in this particular case: The private equity sponsors committed approximately $1 billion of equity to the deal, the rest of which was leveraged financing. They never contributed additional equity, even though Michaels Stores appeared to be in trouble during the recession. At $17 per share, their aggregate stake is worth around $2.77 billion. Moreover, the sponsors last year pulled out $714 million via a dividend recap. They also received a $30 million termination fee related to the IPO (or $28 million if Highfields is excluded), because most LBO firms insist on being paid for work not done.
So it appears to be around a 3.5x cash-on-cash return right now (albeit mostly on paper). I guess happiness is in the eye of the beholder.
PS: Note that this is just the debut price and has little to do with the post-debut “pop” which makes for great optics but is actually terrible for the company.