Invasion of the private equity firms

Private equity investors are coming into the industry with a strength and force not seen in nearly a decade. Though just 12 deals were orchestrated during the second quarter of this year, more than half (58%) involved a private equity investor. During last year’s second quarter, 18 deals were done, but just one involved a private equity player.

According to Craig Battle, managing director of Princeton, NJ-based investment bank Tucker Alexander, which tracks mergers and acquisition activity for Multichannel Merchant, the multiples for businesses have declined. So private equity buyers are buying companies on the cheap, expecting to hold them for three or four years before selling them at a higher price, he says. To get a significantly higher return, however, the private equity buyers will have to purchase additional titles to wring out more economies of scale through efficiencies in catalog mailings or in the distribution center.

Table turns for School Specialty

When: June The facts: Greenville, WI-based School Specialty, a serial acquirer of marketers, became the acquiree when Boston-based Bain Capital Partners agreed to buy the cataloger for $49 a share, or roughly $1.5 billion in cash. The deal is expected to close by the end of October. For the fiscal year ended April 30, School Specialty’s revenue topped $1.0 billion, increasing 11% from $907.5 million the previous year. But acquisitions accounted for much of that sales growth; overall internal growth was 4% for the year, and sales in its traditional business — selling broadline supplies to elementary, middle, and high schools — slipped nearly 1% last year. Net income for the year increased 5%, to $43.0 million. School Specialty last year acquired audio-video supplies marketer Califone and the children’s publishing group from McGraw-Hill Education; in 2003 it had purchased Sunburst Video and Select Agendas. The skinny: Shareholders have filed three lawsuits claiming that School Specialty sold the company for too low a price. “We think the suits have no merit, and we will be fighting them vigorously,” says president/CEO Dave Vander Zanden.

Potpourri: a private equity hot potato

When: June The facts: Chelmsford, MA-based Potpourri Group has long been popular with private equity firms. Miami-based private equity HIG Capital bought the multititle mailer in 1998, then sold it to Cleveland-based Linsalata Capital in October 2002. And three months ago, Bethesda, MD-based buyout mezzanine fund American Capital Strategies paid $188 million for the $160.6 million merchant. Jack Rosenfeld will continue as chairman of Potpourri, which has acquired five companies and nine titles since 1998. The company’s 12 catalogs include needlework title The Stitchery, toys catalog Young Explorers, and gifts book Serengeti. The skinny: Each Potpourri catalog has access to the master database culled from all 12 titles. The master file, which includes detailed customer information such as a full purchase history, “is like having our own private cooperative database,” says Rosenfeld.

Private time for Vermont Teddy Bear

When: May The facts: An investment group led by Boston-based private equity firm The Mustang Group that agreed to acquire Shelburne, VT-based Vermont Teddy Bear Co. is taking the once-public multichannel marketer private. In addition to its titular catalog, Vermont Teddy Bear mails floral gifts title Calyx & Corolla and gift books PajamaGram and TastyGram, Under the terms of the deal, expected to close by Sept. 30, Vermont Teddy Bear’s common stockholders not continuing as investors in the company will receive $6.50 in cash per share upon the closing of the transaction. The skinny: Vermont Teddy Bear will use the cash from its new owners to invest in more private-label merchandise, says president/CEO Elisabeth Robert, “and down the road explore the opportunity to make another transaction.”

Company Market segment Buyer/investor Investment form Est. price (in millions)
APRIL Brookstone Gifts, tools OSIM International, Temasek Holdings, JW Childs Assoc. Acq. of assets $432.6
MAY Crosstown Traders Apparel and accessories Charming Shoppes Acq. of assets $308.0
Dr. Leonard’s Healthcare Health products, gifts Cortec Group Fund III Recapitalization N/A
Vermont Teddy Bear Co. Gifts The Mustang Group Stock purchase $29.2
Neiman Marcus Group Apparel, home decor Texas Pacific Group Acq. of assets N/A
Astrodyne Corp. Power supplies American Capital Strategies Majority investment $31.0
Shalfoon Bros. Dental supplies Henry Schein Acq. of assets N/A
Halas Dental Dental supplies Henry Schein Acq. of assets N/A
JUNE Pfaltzgraff Co. Tabletop Lifetime Brands Acq. of assets N/A
Potpourri Group Home decor, gifts, crafts American Capital Strategies Acq. of assets $188.0
Pearl Izumi USA Fitness apparel Nautilus Acq. of assets $68.0
School Specialty School supplies Bain Capital Partners Stock purchase $1,500.0
Source: Tucker Alexander, compiled from public information and other nonconfidential sources

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