Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

As private-equity firms contemplate how to spend the record cash they've amassed, some are still stuck with grim reminders of boom-era buyouts that have soured.

Leonard Green & Partners, which led a $1.4 billion leveraged buyout of Sports Authority in 2006, is now preparing to restructure the struggling retailer's debt ahead of a May deadline. (Bloomberg News reported on Wednesday that lenders have hired advisers to protect their investment.) The move may end up giving creditors control of the Englewood, Colorado-based company, leaving Leonard Green with a minority stake, board representation and seemingly inevitable losses .

Taking a Hit
Sports Authority is set to restructure its debt, which could hurt private-equity owner Leonard Green.
Source: Bloomberg

Companies tend to grow under the stewardship of private-equity firms, which aim to deliver their investors double-digit annual returns. In the case of Sports Authority, it may have been better off remaining public: Its revenue for the 12 months ended in May “approached” $2.7 billion, according to Moody’s Investors Service -- barely higher than the $2.5 billion in sales that the company reported in 2005. It had around 400 stores when Leonard Green took control, compared to around 470 now, according to Moody's. 

Though it can be argued retailers have had a hard time due to the increasing appeal of online shopping and sites such as, one of Sports Authority’s public rivals, Dick’s Sporting Goods, has grown revenue to $6.8 billion this year from $2.1 billion in 2005 and nearly tripled its store count to 694 over the same period

Because Sports Authority isn't public, it's not immediately clear what went wrong, but interest repayments on some $1 billion of debt that Leonard Green piled onto the company to fund its buyout likely accounted for a large portion of the company's free cash flow. By comparison, Dick's has been able to plow its free cash flow -- and then some -- into capital expenditure. That's given it more freedom to invest in growth avenues like specialty store concepts, distribution and supply chain improvements and e-commerce technology. 

Slipping and Sliding
Debtholders are wary about the prospects for Claire's Stores.
Source: Bloomberg

Other pre-crisis leveraged buyouts that have gray futures include Toys 'R' Us and Claire's Stores, which are both laden with copious levels of debt. Their private-equity backers are holding firm because they face few options: the IPO market isn't open to them and buyers -- both strategic and financial -- don't want to catch a falling knife. 

Apollo Global Management is taking another route, and appears set to walk away from paper maker Verso Corp., for good reason. The firm recouped most of its initial investment in the 2006 leveraged buyout by paying dividends to itself before taking Verso public. Apollo's been a creditor frequently enough to know that any upside to its equity stake -- now worth less than $1.5 million -- just isn't worth fighting for. 

For the firms willing to wait it out, it's not the end of the world: In most cases, outsized returns from other bets allow wiggle room for missteps. But remaining involved in these situations may be time better spent on deals that will actually pay off. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. This is what happened at Guitar Center last year, when Bain Capital relinquished a controlling stake to the retail chain’s biggest debtholder Ares Capital.

  2. Includes Golf Galaxy stores

To contact the author of this story:
Gillian Tan in New York at

To contact the editor responsible for this story:
Beth Williams at