In April, Dallas-based private equity firm Texas Pacific Group sold the last of its J.Crew Group Inc (NYSE:JCG) holdings for $41.3 million, ending a 12-year relationship with the specialty retailer. TPG sold its remaining shares due to a rising stock price in recent months. TPG's history with J. Crew dates back to 1997, when it carried out a $559.7 recapitalization, which included $63.9 million in equity.
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The funding gave TPG an 85.2% stake in the company. Five years later, in 2002, it went after deposed Gap (NYSE:GPS) CEO Mickey Drexler, who slowly built the prep store into a retail contender.
Today, we know J. Crew as a popular wardrobe choice for First Lady Michelle Obama. TPG's investors made a lot of money from J. Crew over the years. Those who invested in J. Crew's 2006 IPO haven't been so lucky.
How Sweet it Is
TPG bought an additional $73.5 million in J. Crew stock in the July 2006 IPO, bringing its total investment to $137.4 million. Now let's see what they were able to get for their gambit.
On January 31, 2007, TPG sold nine million shares to the public at $37.81 for net proceeds of $325 million. This put it squarely in the black with 12.2 million shares still to sell. Over the next 27 months, TPG sold these holdings for $426.3 million, which includes the funds from the final sale in April. All together, TPG made $613.9 million from its 12-year investment, an annualized gain of 15.2%.
This compares very favorably with the S&P 500, which lost 0.4% annually over the same period. How did the IPO investors do? Well, that depends on when they sold. Those that bought the $20 shares and sold July 6, 2006, J. Crew's first day of trading, made as much as 37.5% on their investment. Any hangers-on didn't do nearly as well, making just 39 cents over 33 months. Finally, those investors looking to benefit from the momentum play buying the stock the second day of trading and holding until today, have lost 25.8% of their investment. Despite this, it's still better than the 29.1% decline in the S&P 500. Take that, passive investors. (To learn more about private equity, read What Is Private Equity?)
Other TPG Investments
|Company||Shares Held||Market Cap|
|Burger King (NYSE:BKC)||15.13 million||$2.50 billion|
|Graphic Packaging (NYSE:GPK)||132.16 million||$609.77 million|
|Fidelity National Information Services (NYSE:FIS)||2.89 million||$3.51 billion|
|SuccessFactors Inc. (Nasdaq:SFSF)||7.07 million||$486.31 million|
An Appetizing Deal
Burger King, the most prominent of the four listed above, was bought by TPG, Goldman Sachs (NYSE:GS) and Bain Capital in December 2002, for $1.5 billion, down substantially from the $2.26 billion drink maker Diageo (NYSE:DEO) asked for just five months earlier. Analysts suggest TPG and its partners put just $325 million of their own cash into the deal and were in the black by February 2006, when Burger King paid them a special dividend of $367 million. If you add in a one-time payout of $30 million to end a management contract with the private equity partners, pre-IPO investors had to be ecstatic.
Today, TPG holds approximately 15 million shares worth $270 million. Using an average selling price of $20 for the 21 million shares sold between the IPO in May 2006 and today, TPG conservatively has made $447 million in profits from its initial investment with another $300 million payday to come. That's a sweet gain for less than seven years. Meanwhile, Burger King's stock is barely above its IPO price of $17. Some things never change.
The Bottom Line
The above examples reasons investors should avoid IPOs. They just don't favor new investors. (To see how private equity plays a role for different firms, see Private Equity: A Trendsetter For Stocks.)