Ghost
02-05-2010, 10:58 AM
For all who invest, this concept might be interesting. Probably a lot of it going around. Motley Fool sent me this. I suspect the takeaway is to look very closely at the debt load on any company you buy, to see if it is an issue. Who knows, this one may pan out, but it illustrates a sneaky way that it might not be. Especially if the folks who take over a company then sell it off.
The whole thing is available at:
http://www.fool.com/investing/small-cap/2010/01/29/avoid-these-cash-machines.aspx
One legendary private equity shop, Kohlberg Kravis Roberts (KKR), has perfected the ability to extract exorbitant sums of cash from companies in a perfectly legal way. Take a look at the recent stunt it pulled on Dollar General.
KKR and fellow investors Citigroup (NYSE: C (http://caps.fool.com/Ticker/C.aspx?source=isssitthv0000001)) and Goldman Sachs (NYSE: GS (http://caps.fool.com/Ticker/GS.aspx?source=isssitthv0000001)) took Dollar General private in July 2007 at a cost of $7.3 billion. They released the company back to the public markets this past November, offering about 10% of the shares in an IPO and retaining the rest. Following its launch, the company was valued at $7.2 billion.
Now, it looks like Dollar General's investors lost $100 million on the deal, so where's all this profit I'm talking about?
For that, you have to examine how Dollar General was used while it was private. When KKR bought Dollar General in 2007, it and fellow investors put up just $2.8 billion and borrowed the remaining $4.5 billion. At that time, Dollar General had just $260 million in debt, the interest on which it could easily cover with its earnings.
Fast-forward to November 2009 and the IPO. Dollar General suddenly had about $4.2 billion in debt, and its ability to support its own debt is severely crimped. In fact, the business has to pay about 39% of its operating income just in interest. Ouch!
That sudden debt spike shows that KKR and its co-investors simply transferred their borrowings of $4.5 billion onto Dollar General's balance sheet. For their efforts, they took home a 150% paper profit (based on the IPO price), excluding fees and the costs of some rather minimal work they performed in reorganizing Dollar General -- much of which was charged to Dollar General.
As a final kick to the curb, just before making it a public company, the private-equity giant paid itself and other investors a fat dividend, to the tune of $239 million -- more than double what Dollar General earned in that quarter. As a public company, Dollar General doesn't even pay a dividend. And that's not the amazing part...
The whole thing is available at:
http://www.fool.com/investing/small-cap/2010/01/29/avoid-these-cash-machines.aspx
One legendary private equity shop, Kohlberg Kravis Roberts (KKR), has perfected the ability to extract exorbitant sums of cash from companies in a perfectly legal way. Take a look at the recent stunt it pulled on Dollar General.
KKR and fellow investors Citigroup (NYSE: C (http://caps.fool.com/Ticker/C.aspx?source=isssitthv0000001)) and Goldman Sachs (NYSE: GS (http://caps.fool.com/Ticker/GS.aspx?source=isssitthv0000001)) took Dollar General private in July 2007 at a cost of $7.3 billion. They released the company back to the public markets this past November, offering about 10% of the shares in an IPO and retaining the rest. Following its launch, the company was valued at $7.2 billion.
Now, it looks like Dollar General's investors lost $100 million on the deal, so where's all this profit I'm talking about?
For that, you have to examine how Dollar General was used while it was private. When KKR bought Dollar General in 2007, it and fellow investors put up just $2.8 billion and borrowed the remaining $4.5 billion. At that time, Dollar General had just $260 million in debt, the interest on which it could easily cover with its earnings.
Fast-forward to November 2009 and the IPO. Dollar General suddenly had about $4.2 billion in debt, and its ability to support its own debt is severely crimped. In fact, the business has to pay about 39% of its operating income just in interest. Ouch!
That sudden debt spike shows that KKR and its co-investors simply transferred their borrowings of $4.5 billion onto Dollar General's balance sheet. For their efforts, they took home a 150% paper profit (based on the IPO price), excluding fees and the costs of some rather minimal work they performed in reorganizing Dollar General -- much of which was charged to Dollar General.
As a final kick to the curb, just before making it a public company, the private-equity giant paid itself and other investors a fat dividend, to the tune of $239 million -- more than double what Dollar General earned in that quarter. As a public company, Dollar General doesn't even pay a dividend. And that's not the amazing part...