Dividend Recaps: How Private Equity Is Sucking the Life Out of Good Companies


"Neither a borrower nor a lender be; For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry."

-- Shakespeare, Hamlet, Act 1, Scene 3

Shakespeare was right, of course. And it's the "borrowing" that's particularly pernicious -- especially when it comes to the kind of borrowing used by high-powered investors to take companies private. By buying public companies, loading them up with debt, and spinning them back out to unsuspecting investors in the form of overhyped IPOs, America's private-equity firms are ruining some of your favorite brands.

A recent article in The Wall Street Journal tells the tale. In a "going private" transaction last year, private-equity firms Leonard Green and CVC Capital bought BJ's Wholesale Club for $2.8 billion. BJ's was a struggling rival to dominant warehouse chain Costco (COST) and Walmart's (WMT) Sam's Club. It's understandable that a bunch of high-powered investors, seeing a chance to make BJ's even better, wanted to buy it and do some tinkering behind the scenes, free from the constraints of having to answer to public shareholders.

The problem was, "improving" BJ's wasn't what the buyers had in mind. Rather, they were plotting a "dividend recap."

After taking BJ's private, LG and CVC ordered the company to pay them a $643 million dividend -- equal to the entire cash outlay they'd made in the purchase. (They'd borrowed the balance). Of course, BJ's didn't actually have $643 million, so to pay their dividend, the new owners had BJ's take out a loan.

If all goes according to plan, they'll eventually re-IPO BJ's back to the public in a few years -- at which point, new individual investors will get stuck with its debt.

An Oft-Told Tale

If that's how things go with BJ's, it won't be the first time. "Going-privates" that turn into "dividend recaps" and ultimately evolve into "re-IPOs" are surprisingly common.

Take Restoration Hardware. When private equity firm Catterton Partners bought Restoration for $267 million back in 2008, the company owed $103 million in long-term debt. Four years later, Restoration returned to market in an IPO valuing it at $1.2 billion. But rather than being less leveraged and better able to compete, the "new and improved" Restoration Hardware emerged with $144 million in long-term debt -- more than when it went private!

Or consider the case of Bankrate (RATE), the go-to website for homeowners seeking a quick quote before refinancing a mortgage. When Apax Partners purchased Bankrate in 2009, the company was a model for how to efficiently run an Internet business. Debt-free, cash-rich, and profitable, Bankrate was bought for $570 million.

Within a year, though, Bankrate was in trouble. Soon after taking the company private, Apax saddled it with more than $220 million in debt. This helped push Bankrate from the black into the red, where it remained up until it re-IPO'ed last summer.

Bankrate's better now, earning profits and paying down its debt. But one suspects this only makes it a tastier target for a new buyout. After all, after taking Bankrate, breaking it, then selling it back to us, Apax managed to get a $1.5 billion market cap on the Bankrate re-IPO.

Pet Project

Probably the most famous "full circle" transition is Petco, the pet supplies superstore. In 2000, Leonard Green (yes, them again) teamed up with Texas Pacific Group to take Petco private for approximately $600 million. Two years later, the company IPO'ed at twice its buyout price -- $1.2 billion -- producing a windfall profit for its private equity owners.

And yet, when Petco came public again, it was one sick puppy -- losing money, and bearing close to $400 million debt, versus less than $90 million when it went private.

After several years of profitable operations post-IPO, during which time the company steadily improved its operations, earned profits, and paid down its debt, Petco was taken private once more, in 2006, by the same private equity shops that had bought it in 2000. (Investors actually made out OK on this deal. Buying at the bottom of the Internet Bubble-burst, and riding the rebound, they netted an 80 percent gain by the time Petco was re-acquired.)

What It Means to You

So, it worked out well for Petco investors. But what do all these corporate comings (public) and goings (private) mean for the rest of us?

By buying companies, sucking out their cash in sweetheart dividend deals, and loading them with debt, private equity firms are hurting some of our favorite brands. Many of these companies are forced to cut costs in order to repay their creditors. To do this, they may need to lay off employees or close underperforming stores, degrading customer service. Money they might have been invested in store improvements, or lowering prices, may instead be needed to pay down debts racked up during years of private ownership.

When a company announces it's getting bought out, newspapers love to write about the price being paid. The rest of us, well, we should be more concerned about the costs.

Motley Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale.
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Another day, a dozen more comments, yet nobody can explain why companies can be bought cheaply, yet can be used to borrow endlessly against their assets. Don't any of the lenders mind losing their money?
Any time I have wanted to borrow money for a business purpose, I have had to jump through hoops to get the lender to accept the collateral asvadequate. The lender always checked to see if the collateral had already been pledged. If I has tried to funnel the loan proeeds to myself, I would have been sued instantly.
Apparntly if you are a vulture, you get lenderrs to give you money with no strings. What a crock!
All you committed leftwingers are so anxious to buy into this crap, that yu ignore these common sense questions

December 17 2012 at 12:36 PM Report abuse rate up rate down Reply
1 reply to mjrx's comment

Quit trying to confuse the dumb ones with facts, mjrx!

December 17 2012 at 9:39 PM Report abuse rate up rate down Reply

It’s ironic that Republicans constantly bemoan the Deficit and Debt as being absolutely terrible for our country, but if you analyze their actions/statements you realize the GOP really doesn’t care about the economy for these reason:

• They never talk about job creation which would increase revenue and bring down the Deficit/Debt
• They did everything in their power to stall the economy so that Obama would be a one term president
• Deficits didn’t matter when Bush was president
• All they want to do regardless of the consequences is kill the “New Deal” as well as slash domestic programs. There is no talk about reforming these programs
• Expensive tax cuts have been their mantra for 30+ years regardless how expensive they were or that they don’t create jobs. Bush had 2 unpaid for tax cuts and still we had a loss of 600k jobs. Trickledown theory has rarely worked.
• One third of the $800 Billion stimulus was tax cuts, but Republicans were still unhappy with it
• As Krugman has pointed out over the last 4 years, most all their gloom and doom predictions haven’t come true, but still their talking points never change
• Lastly, Obama put $50 billion in new stimulus on the table. Let see the GOP’s response to that.

This deficit/Debt game we are playing is a proven sham

December 17 2012 at 12:18 PM Report abuse rate up rate down Reply
1 reply to chris1011's comment

"Unpaid tax cuts" = imbecile alert.

"As Krugamn has pointed out....." = hopeless imbecile alert.

December 17 2012 at 9:38 PM Report abuse rate up rate down Reply

Soooo...Instead of "Pump & Dump", we have "Suck & Dump"??
Of course it's structured so that no income tax is paid on the deal !!! Jobs fo to China, unemployed to the back of the line, and "Incentive" bonuses paid to all the "brilliant" deal makers.

December 17 2012 at 10:52 AM Report abuse rate up rate down Reply

Sounds like Romneyism to me !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

December 17 2012 at 10:26 AM Report abuse +1 rate up rate down Reply

As the article states: By buying companies, ******* out their cash in sweetheart dividend deals, and loading them with debt, private equity firms are hurting some of our favorite brands. Many of these companies are forced to cut costs in order to repay their creditors. To do this, they may need to lay off employees or close underperforming stores, degrading customer service.

This article explains EXACTLY what Mitt Romney was doing at Bain Capital. Buying distressed companies, looting them of their assets. stuffing that money overseas, then running the company into the ground and filing for bankruptcy., leaving the creditors to fight over the crumbs that were left, and putting hundreds of people out of work and on food stamps. while HE and his investors got rich! Mitt was the Captain of a Pirate Ship.

December 17 2012 at 8:29 AM Report abuse +2 rate up rate down Reply

apex and other buyouts are an example of what we would have gotten if mitt was elected.corrupt business.so we rte lucky we got obama.

December 17 2012 at 8:02 AM Report abuse +3 rate up rate down Reply
Edmond S. Abrain

Sounds like what we are doing to our nation. Loading it up with debt and then selling in back to our taxapayers.

December 17 2012 at 7:35 AM Report abuse rate up rate down Reply

Well boo hoo. Woosification of USA. The current US population would never have mentally withstood the 1930's depression or WWII. God Bless America.

December 16 2012 at 11:22 PM Report abuse -1 rate up rate down Reply

Bain Capital and Mitt Romney certainly meet the description given for an equity vampire. Thank goodness the man was not elected.

December 16 2012 at 7:25 PM Report abuse +6 rate up rate down Reply


CEO's definitely fail.

But the only ones who never win are dumbest 1%ers like someonedumb!
Another foolish comment by the AOL message board wacko.

December 16 2012 at 7:10 PM Report abuse +1 rate up rate down Reply
1 reply to Somey's comment

Another illustration of the staggering stupidity of the poster child of the dumbest 1%!

December 16 2012 at 7:15 PM Report abuse -2 rate up rate down Reply