In October of 1997, Texas Pacific Group acquired an 88% stake in J. Crew composed of $66 million in common equity, $97.4 million in preferred stock (with accruing and payment in kind dividends). The remainder of the nearly $527 million in purchase price was financed through private placement of debt and a mish-mash of the typical sorts of instruments readers of Going Private have come to expect from such transactions. The debt to equity ratio at the time was around 3.2:1.
The best I can decipher the unusually opaque S-1/a filing for J. Crew, they had a series of traunches as well as a refinancing or two over the years. Now, of course, they are IPOing.
As my time this week is dedicated to real deals, my analysis here is limited and I haven't bothered to delve deeply, nor do much with the complex option plan outlined (poorly) in the S-1/a.
Back when it looked like the offering would be $16 per share, TPG assumed they would snag around $321.8 million from the underwriters with an over allotment option (and I expect the underwriters exercised). $279.8, however, they counted on regardless. On top of that, TPG was paying around $73.5 million to snag another block of shares and J. Crew was to borrow another $80 million. Of this they intended to spend it, well, on themselves. Specifically:
$319.8 million to redeem the Series A Preferred Stock.
$112.0 million to redeem the Series B Preferred Stock.
$ 22.5 million in transaction fees.
Any overages in the offering would, they claim, be used to reduce the borrowings, which I describe below.
Just prior (May 15, 2006) to the offering J. Crew used $12.7 million in cash and $285 borrowed at LIBOR plus 1.75% - 2.25% or a base rate formula plus 0.75% + 1.25%. I don't know how their "base rate" is defined, but LIBOR today is around 5.50%, so we can assume that, since the offering was a big hit, they managed to keep their total borrowings near $285 million and, therefore, are looking at the low end of their interest band, or around 7.25 - 7.75%. Not bad, really.
The offering, had it just simmered, would have left on the order of $352.4 million in long term debt sitting in J. Crew. It probably didn't sink that far given the opening price ($20.00, instead of the $16.00 used to calculate the above).
This is an interesting dynamic. If there's enough investor interest, the total long-term debt on an IPO like this (i.e. one used primarily to cash out a private equity holder and service the massive debt used to pay dividends to the private equity holder) is reduced and the offering gets more interesting, bringing in more investors and reducing the debt more and therefore... you get the idea. I wonder if underwriters are savvy enough to point this out when pitching the deal. "We are so oversubscribed the debt level isn't going to be that high post IPO." Hmmm.
So how did TPG do?
Looking at their common stock, TPG had slowly worked down or diluted their 88% position and owned about 56% (17,490,899 shares) of the common stock of the company before the offering. Afterwards, they end up with about 40%. They let go of something like 5 million shares. At $20 each that's a cool $100 million. Add to that the cashing out of their preferred shares (around $431.8 million) minus their new purchase of common ($73.5 million) and they have realized gains of about $458.3 million. Add to that something under a 40% stake in J. Crew (or about 12 million shares) and you get unrealized gains of around $299.3 million (at the current price of $24.94).
Going back to October, 1997 and ignoring some of the recaps, options and other fees (that I may revisit later) we see the following:
Assuming we allocate the cost of the original common share purchase pro-rata to the split of common that is realized (i.e. offered in the IPO) and the unrealized common gains (still held by TPG after the IPO) we see that on their preferred shares they saw realized gains of around 16.30% IRR. Not bad given the length of the investment. On the realized gains on the common shares they managed a 21.64% IRR. Unrealized gains on common show a 23.63% IRR. Total gains, realized and unrealized are around 19.42% IRR.
Bear in mind that the pro-rata allocation isn't really the way I should be doing the realized v. unrealized common analysis. I also know there are some recaps in J. Crew's history and I suspect TPG took some capital out of those years ago. I also am not factoring in management fees and any management agreement breakup fee. (There might not be one since this is such a long holding for TPG).
