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As many private equity firms retool themselves into distressed debt investors, industry veteran Kohlberg & Co. is preparing to buy at least one target, Centerplate, the old fashioned way.
When National City pulled the plug last month on a USD 175m loan slated to refinance debt as part of the purchase, Kohllberg offered to buy the sports-venue caterer with just USD 125m of its own cash, said two sources familiar with the matter.
Closing a deal of even this diminutive size would be no small feat for Kohlberg given market conditions, but it presents a bitter pill to Centerplate’s board of directors. Just seven months ago they turned down an offer from a strategic bidder willing to pay more than double the money now on the table, said the sources.
Kohlberg’s proposal still needs approval from lenders in the company’s USD 172.5m GE Capital-led senior credit facility and votes fell due 19 December on the matter, the two sources said. If loan holders agreed, the transaction would epitomize the hard choices facing both private equity buyers and struggling corporates in the new financial order.
Officials from Centerplate and GE Capital did not return requests for comment.
Centerplate is asking its lenders to amend the credit facility to allow the proposed transaction, which would pay down some subordinated debt ahead of the credit facility, and to extend the maturity of the existing loans until 2012 from 2010, both sources explained.
Kohlberg offered lenders USD 53m of the USD 125m cash infusion to pay down USD 28m of Centerplate’s USD 77.5m revolver and USD 25m of its USD 95m Libor+ 375bps term loan. Another USD 42m of the cash will be applied to buying out all of the company’s equity and half of the subordinated 13.5% bonds attached to the shares. Centerplate issued the shares and bonds together in FY03 as income deposit securities, or units, that paid both dividends on the equity piece and interest on the bonds.
When issued in December 2003, the units were valued at USD 5.70 of principal amount for the bonds with an expected USD 1.56 in annual dividends and coupons, according to SEC documents. The IDS initially priced around USD 16.00 and traded in the USD 15.00-USD 20.00 range until FY08 when they nosedived, hitting USD 0.66 this week. Kohlberg’s current offer values the units at USD 4.00 each, the sources said.
Centerplate started to struggle under its capital structure late last year as the worsening US economy slowed traffic at the venues it services. The company’s problems came under closer scrutiny when its main lender, GE Capital, sold the last of the units it held by early December FY07, when they still traded around USD 13.00, according to SEC filings. In addition to arranging the company’s credit facility, GE Capital was one of its former sponsors and purchased a block of the IDSs at issue, according to a sellside analyst and SEC documents.
Declining cash flow threatened in January to force a covenant breach on the loans that would have prohibited monthly dividends on the units. Management negotiated an amendment permitting dividends to go through until March for a USD 250,000 fee and the IDSs held their ground around USD 10.00. But operations worsened on 2 April when the company lost its contract with the New York Yankees and the units dived to below USD 4.00.
A bird in the hand…
The very next day, Centerplate received an unsolicited expression of interest from one of its competitors that culminated in an acquisition bid at USD 8.25 per unit a week later. Despite the company’s rapidly deteriorating performance and gathering storm clouds on the economic horizon, the Board rejected the offer and hired UBS to manage an auction while reviewing balance sheet restructuring alternatives, according to SEC documents.
In May, Centerplate agreed to pay UBS a minimum of USD 4.5m in fees for its services and negotiated yet another amendment with the GE-Capital led syndicate to buy time for the sales process. This covenant reset cost considerably more than the last one at USD 2.3m in fees.
By June, UBS received non-binding bids from three strategics and eight private equity shops, including Kohlberg, which bid USD 8.25-USD 9.25 per IDS. Financial markets continued to worsen and by July the company had just three second round bids. Kohlberg – the highest of the three – had lowered its bid to USD 7.50, below the initial offer from Centralplate’s competitor in April.
UBS and Centerplate’s legal counsel, Cahill Gordon, negotiated with the three parties into the next month even as the company’s earnings plummeted and the bids slipped accordingly. Kohlberg emerged as the clear leader in late August but by then the would-be buyer told UBS it might not be able to secure financing for the deal.
National City eventually agreed to arrange loans to back the acquisition on a best efforts basis and on 18 September Centerplate’s Board authorized a sale to Kohlberg that would take out the IDSs at roughly USD 4.00 each. But as the aftermath of Lehman’s 15 September bankruptcy wreaked havoc on credit markets, Nat City developed a case of cold feet and on 29 October the lender backed out of the financing citing market conditions.
That left Centerplate in a vulnerable position as the Board believed that “in the absence of a sale transaction or other restructuring of the company’s debt, its lenders would not agree to further amendments or waivers of the credit agreement,” according to the proxy statement concerning the initial sale agreement.
With no access to the debt markets in site, Kohlberg is ponying up its own money to take out 50% of the subordinated bonds at USD 3.99 each and all of the outstanding equity at USD 0.01 per share, the sources and sellside analyst said. Centerplate’s performance continues to worsen – the company booked a net loss of USD 25m in 3Q08 compared to a gain of USD 6m in 3Q07 – but could re-attract strategic buyers in the future, the analyst said.
Aramark, Sportservice and the Compass Group would make the most logical matches but a smaller competitor, SMG-Savor could make a go of it too, the analyst said. SMG already operates ticketing services in many of Centerplate’s venues, offering potential for both vertical and horizontal integration, he said.
Kohlberg may not be the only investor betting on a strategic takeout down the road. The Baupost Group disclosed a 10.75% stake in the IDSs as of 31 July, although it remains unclear whether the Boston-based fund run by Seth Klarman sold out in the ensuing volatility.
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