Wealth Management
September 30, 2009
Will the Queen have to ask again?
September 29, 2009
Ontario's Teachers Pension Plan buys Simmons Mattress
There was a time, not long ago, that mattress business was terrific. There were big margins and if you were supplying hotels at Vegas, for example, you had it made. In fact, Profit magazine’s top fastest growing companies featured one of Canada’s family businesses, Price Mattress, that manufactured mattresses but managed to sell into the USA back in the good old days.
Gerry Price took a smarter approach. He figured out how to add incremental improvements to the mattresses made at his plant in Toronto, yet charge less than Sealy, Serta and Simmons. He then wooed key retailers with exclusive deals on a mix of attractively priced private-label brands and models licensed by Oklahoma City-based Lady Americana Associates Inc. His resulting revenue growth has been anything but sleepy, from $1.3 million in 2000 to $21.6 million in 2005. This 1,588% increase placed Price Mattress 38th on the 2006 PROFIT 100 ranking of Canada's Fastest-Growing Companies.
Gerry Price was a fighter but did not manage to save his company this recession. So it is no surprise that the Simmons Company, maker of Beautyrest mattresses, said on Friday that it planned to be sold to private investors in a $760 million transaction. The New York Times reported that it would include a bankruptcy filing.
The company said it had support from more than the two-thirds of its noteholders and lenders needed for a prepackaged restructuring planthat would reduce its debt to about $450 million, from $1 billion.
The buyers are Ares Management, a private equity firm, and a unit of the Ontario Teachers’ Pension Plan. The mattress sector has been hurt across the board by the downturn in the economy. The Simmons filing would be on the back of those from Foamex International, a maker of polyurethane foam used in mattresses; Consolidated Bedding, which makes the Spring Air mattress brand; and retailers including 1-800-Mattress and the Mattress Discounters Corporation. The company will put the plan out to a vote soon and expects to file for bankruptcy in 30 to 60 days, a Simmons spokesman said. The bankruptcy could then take two more months, he said.
Simmons has been in negotiations with lenders after it failed in late 2008 to meet loan requirements related to debt associated with the 2003 purchase of the company by the private equity firm Thomas H. Lee Partners from Fenway Partners, another private equity firm, the spokesman said. Simmons said the purchase price included equity injections from the buyers as well as debt commitments from some lenders. Simmons also said it had lined up $35 million of debtor-in-possession financing from existing lenders to keep operating while in bankruptcy. The company said its Canadian and Puerto Rican units were not expected to file for bankruptcy but were among the assets being acquired
September 28, 2009
Baby steps
Open wide, Mummy wants you to eat well and grow up nice and strong. So does the Carlyle Group. want to grow. In fact, David Rubenstein said in a speech earlier this year that most of Carlyle’s growth will be in China and India.
With that strategy in mind, Carlyle bought a 17%-ish stake in one of China’s biggest baby-formula companies, Yashili Group Co. These guys were the people who thought it is OK to put some melamine in its baby formula. Apparently, Melamine passes food tests and adds minerals, but has an unfortunate side effect when eaten by humans. Carlyle is the latest in a line of PE firms who see the potential for profits here, including Kohlberg Kravis Roberts & Co., CDH Investments and Hopu Investment Management Co. I just hope they can bring in some ethical thinking, not just growth of profits. Carlyle has a strong management team with a solid ethical core and I think this will impact on Yashili Group's guiding principles.
Jacoline Loewen, (jbloewen at loewenpartners.com) is a partner in a private equity firm, Loewen & Partners, dedicated to raising capital for family business owners and developing their growth strategies.
September 26, 2009
99 Bottles of Beer
Jacoline Loewen, (jbloewen at loewenpartners.com) is a partner in a private equity firm, Loewen & Partners, dedicated to raising capital for family business owners and developing their growth strategies.
September 25, 2009
TIE was a friendly place to be
I attended
The warm and erudite Sunny Kumar was there, representing MaRS and Ontario Centres of Excellence. He was commenting on the restrictions in size for government loans to start up companies. The maximum is $500,000 which sounds like a lot if you were given that personally, but burns up quickly once you are trying to build a product and get clients.
Sunny is an expert in medical and pharma businesses but is also helping with other start ups at MaRS. You can reach him at sunny.kumar at oce-ontario.org
What we can all learn from Sam Walton
In these times, business owners need more than a coffee to get going. I find a bit of inspiration when I listen to Sam Walton's wise words. Even though he has been gone a long time, his legacy of Walmarts lives on. Take a look at his ideas, so many are now industry best practices:
Rule 1: Commit to your business. Believe in it more than anybody else. I think I overcame every single one of my personal shortcomings by the sheer passion I brought to my work. I don't know if you're born with this kind of passion, or if you can learn it. But I do know you need it. If you love your work, you'll be out there every day trying to do it the best you possibly can, and pretty soon everybody around will catch the passion from you — like a fever.
Rule 2: Share your profits with all your associates, and treat them as partners. In turn, they will treat you as a partner, and together you will all perform beyond your wildest expectations. Remain a corporation and retain control if you like, but behave as a servant leader in your partnership. Encourage your associates to hold a stake in the company. Offer discounted stock and grant them stock for their retirement. It's the single best thing we ever did.
Rule 3: Motivate your partners. Money and ownership alone aren't enough. Constantly, day by day, think of new and more interesting ways to motivate and challenge your partners. Set high goals, encourage competition, and then keep score. Make bets with outrageous payoffs. If things get stale, cross-pollinate; have managers switch jobs with one another to stay challenged. Keep everybody guessing as to what your next trick is going to be. Don't become too predictable.
Rule 4: Communicate everything you possibly can to your partners. The more they know, the more they'll understand. The more they understand, the more they'll care. Once they care, there's no stopping them. If you don't trust your associates to know what's going on, they'll know you really don't consider them partners. Information is power, and the gain you get from empowering your associates more than offsets the risk of informing your competitors.
Rule 5: Appreciate everything your associates do for the business. A paycheck and a stock will buy one kind of loyalty. But all of us like to be told how much somebody appreciates what we do for them. We like to hear it often, and especially when we have done something we're really proud of. Nothing else can quite substitute for a few well-chosen, well-timed, sincere words of praise. They're absolutely free — and worth a fortune.
Rule 6: Celebrate your success. Find some humor in your failures. Don't take yourself so seriously. Loosen up, and everybody around you will loosen up. Have fun. Show enthusiasm — always. When all else fails, put on a costume and sing a silly song. Then make everybody else sing with you. Don't do a hula on Wall Street. It's been done. Think up your own stunt. All of this is more important, and more fun, than you think, and it really fools competition. "Why should we take those cornballs at Wal-Mart seriously?"
Rule 7: Listen to everyone in your company and figure out ways to get them talking. The folks on the front lines — the ones who actually talk to the customer — are the only ones who really know what's going on out there. You'd better find out what they know. This really is what total quality is all about. To push responsibility down in your organization, and to force good ideas to bubble up within it, you must listen to what your associates are trying to tell you.
Rule 8: Exceed your customer's expectations. If you do, they'll come back over and over. Give them what they want — and a little more. Let them know you appreciate them. Make good on all your mistakes, and don't make excuses — apologize. Stand behind everything you do. The two most important words I ever wrote were on that first Wal-Mart sign: "Satisfaction Guaranteed." They're still up there, and they have made all the difference.
Rule 9: Control your expenses better than your competition. This is where you can always find the competitive advantage. For twenty-five years running — long before Wal-Mart was known as the nation's largest retailer — we've ranked No. 1 in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you're too inefficient.
Rule 10: Swim upstream. Go the other way. Ignore the conventional wisdom. If everybody else is doing it one way, there's a good chance you can find your niche by going in exactly the opposite direction. But be prepared for a lot of folks to wave you down and tell you you're headed the wrong way. I guess in all my years, what I heard more often than anything was: a town of less than 50,000 population cannot support a discount store for very long.
Jacoline Loewen, (jbloewen at loewenpartners.com) is a partner in a private equity firm, Loewen & Partners, dedicated to raising capital for family business owners and developing their growth strategies.
September 24, 2009
How not to strengthen your company brand
I ride a 2006 Honda ST1300. The brand, and the specific model that I own, have earned the respect that it enjoys and deserves. But recently the company has begun to move away from an independent dealer network and towards a network of “Honda only” dealers that sell not only the motorcycles, but also the company’s brand of generators, outboard motors and even lawnmowers. My guess is that it is a move designed to strengthen the over-all company brand and leverage the reputation in some marketplaces (motorcycles perhaps) to improve the brand’s success in others (lawnmowers perhaps).
I had counted on replacing my rear tire when I got to
I rode to the nearest town with a Honda dealer in the hopes of getting the tire changed. I discovered that they didn’t have one in stock, which was not really unexpected. (It is a fairly unique model). What was unexpected though was when they told me that it would take a week to have one shipped there, and that “nobody airships tires up here anymore”. My choice was to wait a week, or head out and hope to make it to a larger center with a tire in stock. I decided I had no real choice but to take my chances and go.
When I got to the other end of town, I noticed another motorcycle dealer that carried a couple of different brands of motor products. I pulled in and asked if they had a tire that would fit my bike. After a few minutes, the parts manager came out with 3 tires - none were the exact size, but they would fit. But then he offered me one further option. “If you want the exact tire sir, for about $50 I can have one flown up here. I could have it here by tomorrow, the day after at the latest.” I chose one of the tires he had in stock, and before I had a chance to catch up on all my emails (and do my Facebook updates) using their customer accessible WiFi connection, they had my tire replaced and I was on my way.
A couple days later, while almost exactly in the middle of a 6 hour stretch without any services, a stone thrown by transport truck rocketing through a gravel section of the highway under construction, pierced my radiator. Green coolant was now spraying all over my front disk brake. In tough situations like that, I did what I always do first: I called my wife!
My riding partner (“Charlie”) and I found a small lodge with a satellite phone connection and diesel generated electricity. We rented their last room (an authentic little log cabin), had dinner, and hoped my wife would be able to find a radiator and somehow get it to us.
My wife located the nearest dealer, about 4 hours away from where I was. They told her that they didn’t have one in stock (no surprise really), and if she wanted to order one they would have it in a week to ten days. She asked about the cost to expedite the order, but they told her that they didn’t do that anymore, they “order everything through the system.”
Not wanting my little adventure to keep me away a full week (or more) longer than she counted on, she called a local independent dealer that was recently disfranchised. They called another independent multi-brand dealer out west that still had their franchise. They in turn ordered and expedited the radiator and were prepared to send it to any dealer in any town that I might be able to get to.
Charlie is not only the best friend from my youth, he is also a certified Porsche and Audi technician – and one helluva MacGyver impersonator.
With the standard Honda tools, a pen knife, an air mattress patch kit, and a couple of electrical tie wraps, he sutured and patched my radiator so that we could ride out of our wilderness lodge and towards the nearest town. We made it to the first town 3 hours away with no trouble, so we went to the next, and then the next. In two days, we rode 1000 miles, with the patch, to the dealer that had ordered and expedited the rad. Four hours later, Black Beauty (my bike) was as good as new When I reflected on this adventure within an adventure, I believe I discovered a serious flaw in this new “single brand” dealer network. For them, their primary advantage and their primary purpose both related to the brand. They support the brand, and they are supported by the brand, But when it comes to the motorcycle marketplace, it’s not about the brand. It’s not even about the motorcycle. It’s all about the rider.The same is true in all businesses, and especially in our manufacturing industries. It’s not about the brand. It’s not about the equipment, or the technology, or even about the product. It’s all about the customer. Whoever meets the needs of the customer the best, wins.
Paul Hogendoorn is president of OES, Inc. and a founding member and past chair of the
September 22, 2009
The Great Escape
There can be no more sobering illustrative example of these realities than today’s
A cartoon of Uncle Sam with upturned hat asking: “Brother, can you spare a trillion or two?” (Canadian Business - February 16) stays in my mind. There’s also the quip about the
If there is some accompanying comfort, it might be that the
The immediate risk emerges as disinflation, if not deflation, as wages shrink and energy prices fall from their peak levels of a year ago. I concede it may take years for these conflicting forces to play out, but I’m still troubled by the prospect of all that money chasing insufficient goods and services and our politicians succumbing to expediency. Agreed, raising taxes and cutting back on government spending are not usually the best way to win elections. (Not surprisingly, Gordon Brown and Stephen Harper are both apposed to such measures.) There are also finite limits to how much governments can borrow. Monetizing the deficits may sound the better solution, but this is simply a glorified word for inflating the system with cheapened money, thereby diminishing the burden of public debt.
Michael Graham, from his newsletter - The Great Escape
Jacoline Loewen
How the economists missed the biggest thing in their lives
"Why the heck did they not know?" is a common question at economic presentations these days. Today's guest blogger, Michael Graham, elaborates.
Recently, the Queen pointedly asked the brains of my alma mater, the
Those free-market champions Ronald Reagan and Margaret Thatcher would certainly not approve of the bailouts, relief packages, loan guarantees and diverse other rescue measures provided financial institutions and auto manufacturers judged too big to be allowed to fail. The very successful “cash for clunkers” incentive only adds to what one critic has expressively likened to a bewildering alphabet soup.In the case of the
No doubt, government intervention on today’s scale must make it harder to keep participants in disciplinary line. As a result, daunting economic risks stand to become all the greater. Nevertheless, to quote Jeffrey Immelt, Chairman &
There could be offsetting comfort in comedian Will Rogers’ homily that “the good thing about government is that we don’t get what we pay for”. But, like it or not, we have entered a prolonged government-private sector partnership of unknown consequences on a scale few would have ever imagined. It must be remembered, that government spending cannot prop up wounded economies indefinitely. Nor can pump-priming fiscal deficits be recipes for sustainable economic growth. Rising government debt also inhibits fiscal and central bank manoeuvrability. A trio like this can bring only short-term stimulus at best.
Web: grahamis.ca
Email: Michael@grahamis.ca
September 21, 2009
Recession in Canada is officially over
I listened to two economists today at separate presentations. Who was it who said ten minutes spent with an economist is ten minutes wasted? Well, Don Drummond was certainly not one of those economists. He told the TD Bank audience - the recession is over.
I also ran into Michael Graham who sent me his newsletter with its useful insights. Here is Michael's view on the recession this year.
We are going to be able to tell our children and grandchildren how we – and they – escaped the next Great Depression. But only after 12 to 18 harrowing, high-anxiety months morphed into the worst financial crisis since the 1930s. Although there wasn’t a 1929-style stock market collapse, an extremely painful accompanying bear market (the second within a decade) included innumerable downward plunges. Let there be no doubt, as well, that the Great Escape of 2009 came at a fearsome price for which our generation must take full responsibility.It’s not that depression scares are new. Neither are recessions or bear markets which come and go like the seasons, usually presaging healthy restoration and rebalancing. In fact, I think I can safely record that my business career now spans six recessions and ten bear markets, shortly (I hope) to be succeeded by a seventh recovery and an eleventh bull market. Instead, what was so different this time round was an unforeseen and highly-contagious worldwide banking crisis that threatened – and in many instances toppled - household names like dominos. In the process, previously- reckless banks, desperate not to risk their badly-impaired capital any further, wouldn’t even lend to one another. Talk about broken trust.
The universally respected Paul Volcker, former Federal Reserve chairman, couldn’t have summarized what happened more aptly: “I don’t remember any time, maybe even in the Great Depression, when things went down quite so far, quite so uniformly around the world.” Yes, it was a very narrow escape indeed.
Jacoline Loewen, private equity, Toronto
September 18, 2009
Is there redemption in deal making?
That question is front and center in light of the announcement this week that the Parallel Petroleum Corporation had agreed to be acquired by an affiliate of Apollo Management in a deal valued at $483 million, including the assumption or repayment of $351 million in debt.
The New York Times has an interesting article on this - summarized here:
Apollo has been painted as one of the chief private equity villains of the financial crisis. The firm earned this reputation by orchestrating an attempt by Hexion Specialty Chemicals, which Apollo controls, to escape its obligation to acquire Huntsman. Apollo succeeded in this attempt, but its reputation suffered both externally and possibly internally as its investors sweated the possibility of a big damages award. Parallel’s announcement clearly is a signal to the market that Apollo is not permanently exiled.
But this does not mean that targets will blindly trust private equity. Prior to the financial crisis, the private equity acquisition agreement typically included a reverse termination fee that allowed a suitor to walk for any reason by paying this amount. Targets granted this right because they relied on private equity’s reputation for completing deals. Parallel filed its own acquisition agreement on Tuesday with the Securities and Exchange Commission. Parallel is willing to deal with Apollo, but the agreement itself shows that there is little trust. Instead of relying on reputation, Parallel reverted back to contract terms to ensure that Apollo lived up to its promise. While some of this may be attributable to Parallel’s state and need for certainty, the Parallel deal is yet another sign that a new private equity deal model is developing.
First, the acquisition agreement in the Apollo/Parallel deal does not have a financing condition. This is normal. However, this deal is all equity-financed by Apollo, which is injecting $283.2 million. This means that in order to do the deal, Apollo is taking the credit risk for any new financing as well as refinancing Parallel’s $150 million senior notes. This is a sign of a return to normalcy in the markets, but it also reflects the lengths Apollo had to go to secure this deal.
Second, the equity commitment letter was not disclosed on Tuesday. It will be disclosed with the tender offer documents. (An aside: When is the S.E.C. going to force the disclosure of these documents with acquisition agreements?) But the merger agreement appears to state that Parallel has a right to specifically enforce it. That is, Parallel can sue to force Apollo to specifically perform its obligations under the equity commitment letter instead of paying monetary damages. This is also a sea change. Before the financial crisis, a target only had a right to sue the shell subsidiary acquiring it. The only exception I remember was in the Fortress/Penn National Gaming deal.
In such a scenario, if there was even a right of specific performance, a judgment was required first against the subsidiary, forcing it to sue the buyout firm to perform on the equity commitment letter. Then the subsidiary would somehow have to pursue a lawsuit against its owner. This was a high hurdle. But the private equity firms wanted to keep their liability remote and insisted on it. The Parallel deal and its different approach is another marker that the practice is not likely to continue.
Third, this is the second significant private equity deal in recent months (the Bankrate deal is the other one) in which there is not a reverse termination fee. In other words, the buyer cannot terminate the deal by simply paying a preset fee. Instead, the Parallel merger agreement requires specific performance. Parallel can sue to force the Apollo subsidiaries to perform their obligations, and since these are shells, Parallel can also bypass these subsidiaries to sue on the equity commitment letter to force the money to be provided.
As in other recent private equity agreements, including the Sum Total/KKR Accel agreement, this deal requires that Parallel first seek specific performance as a remedy. Only if specific performance is unavailable can Parallel seek monetary damages and specifically the benefit of the share premium, and only then after giving Apollo two more weeks to perform its obligations.
This is a nice benefit to Apollo. It essentially provides them a free pass on litigation — with a maximum cap of having to close the deal. Because of this, future targets may want to rethink this provision.
Because the Parallel deal is all equity-financed, it can be a tender offer, which means it can close 20 business days after the tender offer commences, as opposed to the two to three months necessary for a proxy contest.
Previously, the margin rules and need to market the debt financing had made it difficult to structure deals as tender offers instead of mergers. The margin rules, Regulations U and X, limit a lender’s ability to lend money on margin stock. “Margin stock” includes any publicly traded security (e.g., Parallel stock). A private equity firm that wants to do a debt-financed tender offer can get around this problem by structuring the deal to comply with these margin rules and limit the amount of its borrowing to 50 percent of the value of the collateral pledged to secure the loan (i.e., Parallel).
Historically, this was lower than a private equity firm is willing to go.
And the tender offer has tight conditions. If you look at Annex A to the acquisition agreement, these are the bare minimum conditions you see in a tender offer — no material adverse change, requirement of regulatory approvals, etc. There is nothing like the minimum cash or Ebitda conditions you often would see in private equity deals.
The Parallel and Bankrate deals show that a new private equity model is developing. Private equity is focusing on the low side range of middle-market deals and negotiating tight contracts with no financing out, specific performance, all equity financing and a guarantee enforceable by targets.
Vice Chancellor Stephen P. Lamb's opinion in Huntsman/Hexion and the private equity implosion appear to be having lasting impacts. Nonetheless, this all-equity model is not portable to larger deals, so it remains to be seen if the historical structure of private equity will shift if and when private equity ventures deeper into the deal pool.
Still, the fact that anyone is still willing to deal with Apollo means a lot for private equity generally and perhaps the short memory of Wall Street. It would also be interesting to know if Apollo had to pay a slight premium for its reputation risk. But that is hard if not impossible to determine. If true, though, it would show that markets are much more efficient than the day’s conventional wisdom.
September 7, 2009
Replicate the strategy of companies that triumphed slumps.
September 6, 2009
Does Private Equity need to re-look the people assets?
September 4, 2009
What private equity does for your business
At its recent CEO Roundtable, Loewen & Partners and the Richard Ivey School of Business recorded a podcast with Sacha Ghai, global private equity expert and the author of the McKinsey Private Equity Canada 2008 report. McKinsey's annual report is an overview of key forces affecting Canadian private equity markets. The report provides a perspective on the short and long term implications for PE players, following the economic downturn. Looking forward, PE firms will create value by focusing on attractive niche opportunities.
Listen to podcast: What Private Equity Does for Your Business -
Sacha Ghai, McKinsey & Company,
chats with Jacoline Loewen for the Financial Post Executive
Download Full Report (PDF 2.32MB)
September 3, 2009
Percent of PE by Deal Size
In its analysis of private equity activity during the first six months of 2009, PitchBook Data, a private equity research firm, reveals that lower and middle-market companies continue to successfully attract PE investment. Through the first half of 2009, middle market deals accounted for 70% of all investments, more than at any time in the last six and half years.
The new emphasis on deals under $50M means more financing options for small and medium enterprise business owners.
Jacoline Loewen, Author of Money Magnet.
What you can learn from fishing
How often have you heard the story where an entrepreneur risks their business to get the big fish? Doug Trott, founder of PriceMetrix, is one of those owners and the big fish he landed happened to be one of the world’s largest diversified financial services companies - Morgan Stanley. Doug says, "We were convinced that we had a solid track record and the integrity of our product was such that Morgan Stanley would have the confidence to use our service."
However, the risk of the deal falling through was high, made even more so, given the raging financial crisis. "By the time we got into October last year, the market was tanking and then by mid-December there was talk that Morgan Stanley was going to go insolvent”, said Mr. Trott. Thankfully, the insolvency rumours were just that, and a deal was finally struck. In April 2009 PriceMetrix officially started delivery of services to Morgan Stanley. When it comes to fising, go for the big ones because you might just catch one.