By Dan Primack
December 7, 2011

I don’t like dividend recapitalizations. No, that’s too mild. I despise them.

From my (apparently) naïve perspective, private equity firms should buy a company, help grow it and then sell it. Returns should come from the difference between purchase price and sale price, not by adding even more debt onto a company for the primary purpose of enriching shareholders. It’s greed masquerading as risk management, and undercuts valid PE industry arguments about building company value.

So yesterday I read through a lawsuit brought against Apax Partners and TPG Capital, related to a 2006 dividend recap of former portfolio company TIM Hellas. Namely, the plaintiff (a Hellas creditor) accuses the PE firms of a “bleed-out” that ultimately forced the company to become insolvent. Could this finally be a case in which dividend recaps cross the line from improper to illegal?

Here’s the short answer: Unlikely.

It is certainly true that Apax and TPG put a ridiculous among of debt on TIM Hellas, which was virtually debt-free when they acquired it, and pulled more money out of the company than it had generated in revenue the prior year. And it is true that, several years later, Hellas would begin defaulting on that debt.

But the reality here is that Hellas remained solvent after the dividend recap. Not just because some auditing firm said it would, but because it actually did remain solvent. In fact, the firms would later sell TIM Hellas to another PE firm at a higher enterprise value than what they had originally paid (even though most of the increased was on the liability side of the ledger). Moreover, the new buyer opted not to refinance the debt.

The plaintiff’s attorney is arguing that Apax and TPG caused the company’s eventual downfall, because they pocketed more than €900 million via the dividend – cash that later could have possibly helped Hellas avoid insolvency. Moreover, they assert that the only profits from which to dividend came from the debt issuance (which is mostly, but not completely true).

But the original bondholders knew the company’s financial situation, and that the use of proceeds included repayment of “shareholder loans” (a term that one would hope sophisticated investors would investigate before purchasing millions of newly-issued bonds). And, again, it completely ignores the possibility of later mismanagement by the new owner or macro-economic forces that helped convert the debt from manageable to suffocating.

TPG declined comment, except to say that the claims were “without merit.” Apax sent over the following statement: “The plaintiffs’ claims are nonsensical. As plaintiffs presumably know, Apax and TPG sold Hellas to a third party for 3.4 billion euros at virtually the same time the plaintiffs claim that Hellas was insolvent. Moreover, it was not until approximately three years later that the Hellas notes went into default. For these reasons and others, we are confident that plaintiffs’ claims will not succeed.”

Again, dividend recaps are prone to creating destructive fires. And it seems impossible to say that Apax and TPG did right by Hellas. But this particular lawsuit seems to be mostly smoke.


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