Buyout firms want Fruit of the Loom
by Josh Kosman and Katie Anderson
Posted 04:40 PM EDT, Aug-9-2001
The two buyout firms vying for bankrupt Fruit of the Loom Inc. have little experience buying companies out of Chapter 11, but that is not stopping either of them from proposing to take the novel step of financing what could be a $650 million to $800 million deal with an asset-based loan and not one backed by cash flow.
New York private equity firm The Blackstone Group, which is teaming with Russell Corp. on a bid, has never bought a company out of bankruptcy.
Texas Pacific Group, of Fort Worth, which is joining with Gildan Activewear on the other offer, purchased one — airline America West Holdings Corp. — as a co-investor, in 1994.
Sources said both groups want to help finance a deal for the maker of underwear and Wilson athletic apparel via a loan backed by Fruit of the Loom's inventory, which isn't surprising given the murky status of the company's cash flow.
Lenders struggled to think of any recent leveraged buyout that relied on an asset-based, as opposed to a cash flow, loan.
"The desire to utilize an asset-based lending structure is driven by the ability to execute a deal in the market," said Ira Kreft, executive vice president of Fleet Capital Corp. "There are fewer numbers of lenders willing to participate in cash-flow credit facilities. In the asset-based lending market, lenders are willing to hold more of the loan because you do have downside protection."
Questions surround the Ebitda of Fruit of the Loom. For the trailing 12 months ended June 30, the company had $120 million in Ebitda. But officials there say on a pro forma basis, which doesn't include adjustments for discontinuing poorly performing operations, Ebitda is $220 million. An analyst, Ethan Schwartz of Credit Research & Trading, said he believes the real number is between $160 million and $170 million.
Sources close to the auction process said the first-round bids by both groups are in the $650 million to $800 million range. Based on Schwartz's figure, the suitors are offering between a four and five times Ebitda multiple. (Senior creditors, owed $1.2 billion, will likely take a haircut on such a deal.)
Lazard is conducting the auction, and with only two bidders, a winner could emerge rapidly. Fruit of the Loom's Chapter 11 filing was made in the U.S. Bankruptcy Court in Wilmington, Del., and the court would have to approve whatever winner the company's creditors choose.
Spokesmen at Blackstone and TPG declined comment. Press officers at Russell and Gildan were unavailable for comment. Press officers at Fruit of the Loom did not return calls.
Sources said the winning bidder will likely be able to borrow between $550 million and $600 million against Fruit of the Loom's inventory, with lenders likely valuing such a loan at 50% to 65% of what that asset's eligible value is. Lenders, sources said, are likely valuing the loan at 50% to 65% of eligible inventory. Since Fruit of the Loom's eligible inventory's value doesn't likely exceed $1 billion, it's possible Russell or Gildan would contribute some inventory to the collateral base for a loan.
Fruit of the Loom has been building its inventory to regain customer confidence. In the past several years, the company had trouble delivering its product on time, since virtually all of its assembly operations have moved to the Caribbean, Central America or Mexico. Moving manufacturing overseas lowers costs but requires a business to increase inventory levels, since it's difficult to adjust to customer demands and natural disasters, hurricanes, earthquakes or the like, one lender said.
In one proposed Fruit of the Loom syndication for one of the bidding teams, sources said a lender is offering two tranches with rates that don't exceed LIBOR plus 300. In contrast, a similar cash-low loan might have a tranche B that is LIBOR plus 400.
"For some companies with a significant level of assets, you can basically get lower pricing and pay lower upfront fees and get better execution, and the company is subject to fewer financial covenants," Kreft said.
But would a post-bankruptcy Fruit of the Loom be viable? Some analysts think so.
The company has worked to improve its operating margins since filing for bankruptcy in December 1999.
"Fruit of the Loom is much better off than what appears on the surface," said Susan Sansbury, an analyst with Bear, Stearns & Co. "If people dug deep enough, instead of skimming the surface, they'd see."
Management has been on a cost-cutting mission, too. In March 2000, it closed its Frankfort, Ky., screenprinting and embroidery operations as part of the bankruptcy court-approved wind-up of its sports and licensing division. Fruit of the Loom scrapped its Gitano jeans business and other unprofitable products in 2000. In June, it held a series of court-supervised auctions of warehouses and manufacturing facilities in Frankfort and Campbellsville, Ky.
Financially, things have improved, but Fruit of the Loom still isn't profitable yet. Losses from continuing operations for 2000 were $103.6 million, a significant drop from the $491.1 million in losses the company reported in 1999.
Source: The Deal |
