First, just to clarify, I'm not asking for career...rather an interesting project on the job.
As I was researching this question, I found that the vast majority of deals like this are either distressed / bankruptcy deals or pre-2008 deals with giant buyouts of businesses like radios (Clear Channel) for example.
Recently though, I've noticed buyouts have not only gotten a lot smaller, but there are almost no buyouts of truly declining companies.
I don't mean companies getting outcompeted or suffering from poor execution with a path to recovery, but I mean a truly secularly declining business like, idk, flip phones or calculators or something like that.
If there was a company like that (assume large-cap, highly profitable, but declining over time), which PE firms would be willing to take a serious look?
There are business models that are profitable but not necessarily growth investments that are very popular in PE (think things like O&G, industrials, metals and mining) but no company is going to buy a clearly obsolete technology, except maybe to sell off assets or IP. Some ideas just move past their time and that is okay
There's no benefit and you need positive returns, not negative; and you almost always need to sell to someone else to make money. If someone had bought the largest pager company 20 years ago they would have nothing to show for it now, that idea doesn't make sense
Thanks for the response! Totally get that, and definitely the biggest challenge would be trying to maintain, let alone expand the multiple at exit. And of course, trying to find a buyer at exit would be tough also.
That said, even a perpetually declining asset can generate returns at a low enough price assuming the sector can survive in the near term despite impending obsolescence.
Like, for example (just completely making up numbers), an asset you can buy out for 5x EBITDA with 40% stable FCF margins but almost guaranteed to decline low-to-mid single digits (with a “sprinkle” of downside risk…) for the next ~10-15 years.
Assuming avg. holding period is 5 years (not sure if still the norm), there’s potential for a secondary exit to another sponsor (or two) before the business is no longer “marketable”.
The example is hyperbolic, and whole thing is a long shot of course, but just wanted to check if WSO knew of any precedent examples or potential sponsors before I definitively tell my MD this idea is cooked.
Okay so you’ve bought at 4x EBITDA. 5 year hold at 40% margins, 100% FCF (just for sale of argument. Assume you got got 2x EBITDA leverage. Post tax and interest that doesn’t even come close to return your capital (do the math yourself). Then you sell it off 3x EBITDA (generous but okay) off 75% of your own buy out EBITDA (so that’s half your own buyout capital)). So now you’ve paid off the debt with your exit, and probably made another 0.5x(?) EBITDA MoC from cash flow. So loads of work to do 0.5x MoC in 5 years. And that’s before taking into account fees...
Obviously money can be made if you get lucky, hold longer etc. but that’s a very unattractive proposition for an LP and bound to go wrong. You need growth to make money (which is why the whole “PE are asset strippers” nerds are so tiring as it doesn’t work that way anymore for the last 2-3 decades)
Value players used to always be on the hunt for these, Apollo/Platinum/etc. the biggest struggle here is financing and buying at a low enough multiple for it to even make sense putting the equity to work, which for any scaled asset that’s high cash flowing but declining isn’t as easy as it seems. There usually also needs to be at least one potential lever that brings the asset from a 15% FCF yield play to a 4x - think reorgs, regulatory tailwinds, divestitures, etc.
Thanks! Yep, those were the type of names my MD referenced, but I can’t seem to find any recent examples of them doing a buyout like I suggested. Everything seems to be pre-2010.
I'd argue Apollo's purchase of Michael's has an element of this. Company is/was dying but they're doing Apollo things to it to try and squeeze out a return.
TPG DirecTV
Didn't know about this one. Thanks! :)
Sycamore does this a lot with poorly performing retailers. They squeeze value out of the real estate, supply chain (they own a textiles sourcing firm), spin out assets, play games with lenders :), etc.
Thank you! Yes, this is one of the few we've identified.
Apollo / Tenneco. Half the business is combustion engine OEM. 0x exit multiple.
I work in Infra PE and I would say this is fairly common within the sector, albeit somewhat different than you described.
There are specific firms that have been buying coal assets recently, which trade at absurdly low EV / EBITDA multiples. They are not declining per se (cash flows are fine), but they are assets that have limited to no natural buyer(s) especially in the next 5-7 years. Most of them will be retired 2035ish (if not sooner), but they are free cash flow machines so investors without any sort of ESG mandate can scoop these things up on the cheap relative to the value of their future cash flows and make a nice return.
These are the types of situations you need to look for to do this. We will probably see this strategy rinsed and repeated with gas plants in the back half of the 2040s. As others have pointed out, there other niches where this happens (long-tail natural gas wells), mines, etc. Probably a bit harder to do for vanilla PE, but possible (tobacco pre-Zyn?). You could potentially do this with end of life renewable assets too but that becomes a cost of capital pissing contest so no really way to drive outsized returns
But most opportunities that I am aware of have some external factor that limits the universe of investors (largely due to large LP preferences), so it’s tough for a truly large fund to take advantage of these situations without a ton of ops work to grind out cash flows on the way down of a normal shitco in their investable universe.
Super helpful insight! Thank you for the detailed response.
Would these type of funds be open to non-infra assets though? I would think LPs would have a problem with that given the long-term contracts that de-risk infra assets.
Say an industrials manufacturer with consistent FCF margins. Not an infra asset and revenues are not as secured by long-term contracts, but performance is consistent albeit declining slowly. Would sponsors be able to stretch their mandate that way?
Id say these particular funds probably wouldn’t stretch beyond their mandate given their LPs probably wouldn’t like that, but I think there’s probably a market for what you are talking about.
Maybe the best example I can give is BRK. When they started, Buffet was buying declining textile mills. Berkshire Hathaway itself was a textile manufacturer. I think Buffet called this cigar butt investing before ultimately deciding it was better to buy good companies at a fair price than bad companies on the cheap.
I think that’s the issue with this premise as a broad strategy people don’t like owning bad businesses especially when there’s very limited to no liquidity. Some funds can likely be opportunistic and do 1 or 2 as a platform for the fund, but imagine going to LPs and saying “our strategy is buying companies we know are going to fail that we likely can’t exit and we don’t have certainty that the cash flows in the model will actually be realized. Please write us a fat check”
Obviously somewhat sarcastic, but that’s a tough pitch either way and there definitely could be a niche for it somewhere in the middle market (assuming enough of these opportunities exist), but I imagine raising that first fund would be tough without a track record to back it.
KKR bought a massive margarine business after all…
I worked on a deal like this - a clear secularly declining industry (think print newspaper style). An MMPE firm bought the business and analysed it as a run-off investment. Bought in at a price which resulted in a low payback period (~3 years), any residual cash flows after that 3Y mark were the actual return on investment. Would have been no clear exit, the business would probably just run for a few years and then get shut down. Nevertheless, purchase price was attractive enough that cash flows generated over the 7-10 years or whatever the hold period would be seemed relatively attractive, even assuming no residual value.
In the 1980s and 1990s, KKR / TPG routinely pursued declining business buyouts in mature industries such as paper products and chemicals, with a straightforward thesis of harvesting cash flows while managing decline. However, today's landscape has fundamentally shifted due to 3 factors: accelerated technology-driven decline cycles (shortening harvest periods from 15-20 years to 3-5 years), evolved capital markets (excess dry powder and higher valuations), and challenging exit considerations (limited IPO appetite for mature businesses). This transformation has made pure decline-play investments increasingly rare, but places like Ares (ASOF) and Platinum remain active deep value specialists, maybe Cerberus & Apollo as situational players
Modern declining business investments now require specific characteristics to attract PE interest - successful investments in this space share common elements including multiple cost reduction levers, market consolidation opportunities, strong free cash flow conversion, limited capital expenditure requirements, and potential for adjacent market expansion
just my 2c
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