Blackstone surrenders control of Klockner

Almost five years after paying €1.3bn for Klockner Pentaplast, a German plastics and packaging company, private equity group Blackstone wrote its €220m in equity to zero and handed control of the company to junior lenders a few weeks ago. The new owners are a group of creditors led by hedge fund Strategic Value Partners, some of whom paid as little as five cents on the dollar for the debt.

It was a rare failure for Blackstone, which is probably the most conservative and well managed of the big buyout groups. Still, to many debtholders, the surprise was not that Blackstone walked but that the group kept the struggling chemicals company going for as long as it did. Blackstone "tried to keep the equity alive, even though many people said that they were working for the creditors since the equity was worthless", says one person with knowledge of the matter.

The history of Blackstone's ownership of Klockner provides a measure of both the strengths and the shortcomings of private equity groups as corporate owners.

In retrospect, Klockner's fate was inevitable. Blackstone paid too much, and compounded that mistake by putting in only a sliver of its own money and loading its acquisition with too much debt - 7.3 times its earnings before interest, depreciation, taxation and amortisation. The debt/ebitda ratio subsequently fell.

The list of deals gone wrong is long and, in many cases, the initial thesis was far more questionable and the capital structure far more flawed than in Blackstone's Klockner deal. Recently BC Partners lost control of Fitness First to creditors led by Oaktree, while Denver based fast-food chain Quiznos was acquired by Avenue Capital, with its private equity owners CCMP Capital Advisors and Consumer Capital Partners losing their investment.

The essence of the buyout model involves loading companies with debt.

That is fine in the good times, but when times are bad, that burden means that companies have little breathing room. Most buyouts that go bad do so because the original price was too high. Moreover, the reason for such high prices is because most of the money buyout groups put up is borrowed. During the last cycle, the temptation to overpay was especially great, because so much debt was available at cheap prices and with few terms. The €1.25bn debt financing of the Klockner buyout came with only one condition.

Before its 2007 investment in Klockner, Blackstone had a history of successful investment in the chemicals sector, making five times its money on Celanese, for example. But in Celanese Blackstone got the timing right. By contrast, when the company bought Klockner, it was the top of the cycle, meaning that its estimate of its ability to expand the business was too optimistic.

Historically, Klockner's ebitda was between €125m and €135m, yet the company's management presented upbeat projections that showed that the chemicals group would grow its ebitda by at least €15m every year. "They oversold the company and painted too bright a picture," one senior private equity executive says.

Things went wrong almost from the beginning. Crude oil prices, the principal raw material, rose. Problems with the cotton harvest drove prices for the natural fibre to record highs, forcing many garment makers to switch to synthetic materials, driving up the price of polyester in turn.

Blackstone helped rationalise Klockner's byzantine structure and brought senior advisers and partners to serve on the board. The company spearheaded a series of acquisitions and expanded the business in Asia.

Ακολουθήστε το Euro2day.gr στο Google News!Παρακολουθήστε τις εξελίξεις με την υπογραφη εγκυρότητας του Euro2day.gr

FOLLOW USΑκολουθήστε τη σελίδα του Euro2day.gr στο Linkedin

Klockner tried to buy back its debt when the price fell but Blackstone feared that spending too much on debt buybacks would jeopardise liquidity and was itself reluctant to use its own money to buy back debt for technical reasons.

Meanwhile, Oaktree Capital and SVP began quietly buying up the senior debt. Oaktree has long been one of the biggest beneficiaries of the private equities groups' miscalculations. It has bought numerous private equity-owned companies through the debt at half the price buyout groups originally paid.

However, by late last year it became clear that Klockner would soon breach the limited terms on its debt. Blackstone concluded that there was no chance of a sale at a price that would enable it to get its money back.

Blackstone and Oaktree discussed a deal that involved an injection of cash and a partial conversion of debt into equity that would leave each with 40 per cent of the company. But in an unexpected end to the saga, the junior debtholders paid the senior debt 100 cents on the dollar and took control of Klockner. Oaktree doubled its money while Blackstone lost everything.

In a report at the beginning of July, Standard & Poor's referred to the highly levered financial risk Profile of Klockner under its new owners and forecast an adjusted debt to ebitda of 7.3 times for the financial year ending in September. Many of those familiar with Klockner say that is still too much debt.

© The Financial Times Limited 2012. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation