Rollups are Back
February 16, 2010
The rollup is back. Of course, middle market firms never really discarded the strategy, but the mega firms, specifically KKR and Blackstone, are turning to rollups as a way to put money to work.
My colleague, Kelly Holman, wrote about this recently in a story for Investment Dealers' Digest. KKR, for instance, apparently dusted off its Primedia playbook for its most recent initiatives, backing executives who will pursue deals in the oil-and-gas and the loosely defined consumer services space.
Rollups, if you look at the academic research, don't have a great track record. Primedia, for example, is probably better remembered for the acquisitions that failed -- such as About.com -- than the deals that built the company. Its divestitures also leave more of a mark, as the company had to sell such titles as Seventeen and New York Magazine, when it ran into credit issues early last decade.
Daniel Gross, in a 2003 article for Slate, perhaps best summed up the strategy writing: "With Primedia, KKR tried to build a leveraged company from scratch."
This time around, though, I'm wondering if the mega firms will go about it differently. In the middle market, the idea of a rollup isn't an option of last resort or a response to weakened credit market. It all goes back to the theory that strong management actually trumps the quality of assets when it comes to achieving returns.
These types of deals never went in and out of fashion in the middle market as a result. In fact, they're pretty commonplace, which is why rollups like Riordan, Lewis & Haden's initiative in the consumer durables space, announced this morning, don't necessarily generate the headlines in the Wall Street Journal that KKR's efforts seem to produce.
A roundtable we ran last year focused exclusively on these CEO-centric rollups. At the time, Irving Place's Michael Doppelt asked the question: 'Would you rather an 'A' business with a 'B' CEO, or an 'A' CEO and a 'B' business?' He answered that at his firm the latter scenario usually wins out.
If the mega firms stay true to this idea of a rollup, I think they'll do just fine. If the idea is to just build a leveraged company "from scratch" than we might be looking at the next set of deals academics will point when they try to explain why this strategy fails.
I spent my President's Day painting, which meant a full day of Howard Stern. In one of the replays, from 2001, Stern was discussing the Infinity/Viacom merger and the appointment of Farid Suleman as president and CEO of Infinity following the deal. It's too early to peg Stern as the King of All Analysts, but he actually raised a lot of good points that almost a decade later prove to be pretty accurate.
The key takeaway were his claims that Suleman knew nothing about the radio business outside of his work with balance sheets and capital structures. He spent about five minutes questioning whether he has ever worked in the business outside of the financial realm, concluding that his dentist knew more about running a radio station than Suleman.
Suleman, who left Infinity a year later to head up Citadel Broadcasting, got his revenge when he cut the Howard Stern show from four of Citadel's stations.
Stern, however, is getting the last laugh, as Citadel, earlier this month, put together a restructuring plan that will give lenders control of the company.
The New York Post is reporting that Hooters is on the block, noting that the company has hired North Point Advisors and is already in "advanced talks" with an investor group in Connecticut.
Hooters, this past week, was featured in "Undercover Boss," the reality show in which executives take on entry-level roles at their companies. Thankfully, Coby Brooks did not have to wear the mandated Hooters uniform.
After watching the show, I'm wondering if his experience precipitated his decision to sell the company, which was passed down to him after his father passed away. Otherwise, going on the show and highlighting bad management and the negative perceptions of the brand isn't exactly the best idea ahead of sale process, especially when Brooks offered no real solutions to the issues exposed on the program.
Catterton Partners and Pilgrim Capital, for the record, are two Connecticut firms with experience in restaurants. For some reason, I can't see either buying Hooters.
From a TV viewer's perspective, I actually thought the Hooters episode improved on the show's debut featuring Waste Management. It felt a lot less contrived, as if Hooters didn't have their PR team working in conjunction with the show's producers. At the same time, their bankers probably cringed throughout the episode.
National Pancake Day is closing in on us. I'll have to check, but I'm pretty sure my employer doesn't give me that day off. This year, it falls on February 23, which is a Tuesday.
IHOP is celebrating by giving away free pancakes. Private equity professionals -- or anyone for that matter -- can sign on at IHOP's website to have Huntsman Gay's Steve Young remind you with a pre-recorded wake-up call on the big day.
The event is part of an effort to raise awareness for the Children's Miracle Network. IHOP, with the help of Young, is aiming to raise $1.75 million for the charity.
I think it was Nike that ran a promotion similar to this a few years back. I surprised a few friends, all Red Sox fans, with wake-up calls from Alex Rodriguez. I think they would have been a lot more forgiving if they got free pancakes out of it.
Stephen Schwarzman took to the Washington Post editorial pages to lament the populist push from regulators that seems to be directed at Wall Street. He raises some good points, but I think he whiffs on a couple too
Specifically, he cites:
"We are debating this hugely important issue in an inflammatory political atmosphere in which key participants seem determined to single out the banks for special retribution in reaction to the financial crisis."
The thing is, the lawmakers themselves are getting singled out by the voters, and one by one they're getting pushed out of Washington. Chris Dodd's exit is probably the best example, but Evan Bayh's decision today to bow out seems in line with this trend.
It's a case of the pendulum swinging way too far one way and now chopping off a few heads as it swings back in the other direction. Unfortunately for the financial institutions, they'll probably have to face this populist outrage for the next nine months, at least, up until the mid-term elections.
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