Texas Pacific: Ready, Set, Buy!

The private-equity fund may be gearing up to go shopping

With smoke still rising from the wreckage of the World Trade Center, mid-September didn't seem like a great time for business travel--or big-time business deals. But that didn't deter the globetrotting dealmakers at Texas Pacific Group (TPL ), the U.S.-based private-equity fund headed by turnaround artist David Bonderman. On Sept. 17, the group announced the $660 million acquisition of Telenor Media, a Norwegian phone-directory company. Two weeks later, it took a controlling stake in the global No. 3 silicon-wafer maker MEMC Electronic Materials Inc. (WFR ), based in St. Peters, Missouri. And on Oct. 2, Texas Pacific announced a bid of at least $1.6 billion for Germany's 10th-largest bank, troubled Bankgesellschaft Berlin.

Is Bonderman, one of America's most aggressive value investors, gearing up for his next big shopping spree? Certainly he has plenty to spend. In March, 2000, he rented San Francisco City Hall for a rock-and-roll bash featuring the B-52's, to celebrate after Texas Pacific raised $4 billion, boosting its total funds under management to more than $10 billion. But 18 months later, almost none of the $4 billion has been invested. Bonderman and his partners decline to talk, but a source close to the group says they've been sitting tight because market conditions were too volatile. Now, though, Texas Pacific appears to have the investment climate it likes best: rock-bottom valuations and distressed companies eager for saviors. "In the next 6 or 12 months, you'll see lots of activity," the source predicts.

Predicting Bonderman's next move isn't easy--and it never has been. The 58-year-old lawyer-turned-investment whiz is known for flouting conventional wisdom. He made his first splash in the investment world in 1993, when he led a recapitalization of then-bankrupt Continental Airlines Inc. (CAL ) Bonderman engineered a restructuring that yielded him and his partners $644 million, 10 times their initial investment. In fact, he's still making money from his Continental investment. Over the summer he signed options agreements covering 885,000 shares owned by himself and a group of other investors, guaranteeing them a minimum of about $43 per share. About half those shares have now been sold. In the meantime, Continental shares have plunged to $17.

LONG-TERM BET. Texas Pacific has built a reputation for spotting value in neglected consumer brands worldwide. In 1996, it took a controlling stake in Ducati Motor (DMH ) when the Italian motorcycle maker was near insolvency. Texas Pacific brought in a new CEO, Federico Minoli, who leveraged its legendary brand name by developing a new line of Ducati apparel and opening dozens of Ducati stores on prime real estate from Manhattan to Tokyo. Minoli says Texas Pacific never got involved in day-to-day management of Ducati. "We had agreed on a turnaround plan before they bought the company, and after that, they let me do exactly what we had planned to do," Minoli recalls. Texas Pacific's reward: a sixfold return on its initial investment when Ducati went public in 1999 for $285 million.

Consumer brands are only part of the story, though. Texas Pacific also rescued New York-based HMO Oxford Health Plans (OHP ), a former money-loser that last year posted a 17% earnings increase, to $265 million on sales of $4.1 billion. It also has poured billions into technology companies such as disk-drive maker Seagate Technology LLC and ON Semiconductor (ONNN ), making a long-term bet that the industry will revive. And as a hedge against riskier investments, it has acquired some relatively healthy companies with strong cash flow, such as Telenor Media and Punch Taverns Group Ltd., a British pub chain in which it took a controlling stake in 1999.

Even with their impressive track record--an average 40% return on the fund's longer-standing investments--Bonderman and his partners have their work cut out for them. Texas Pacific employs 80 people who scout for deals from its headquarters in San Francisco and Fort Worth, and from field offices in London and in Asia. But as they look for new investments, they'll face stiff competition from other buyout funds. True, private-equity investment worldwide has sagged for the past year, with deals during the first quarter down an estimated 40% in the U.S., according to PricewaterhouseCoopers. But because private-equity and venture capital funds raised a record $177 billion in 2000, many are now sitting on fat nest eggs and looking to hatch deals. "We can already see there are going to be more investment opportunities at attractive valuations," says Jean-Pierre Millet, European managing director of Washington-based Carlyle Group, which says it has $6 billion available for investment worldwide.

Texas Pacific is especially keen to do deals outside the U.S. It already has $1.8 billion under management by Newbridge Capital Group, a joint venture through which it invests in Asia. In January, 2000, Newbridge bought a majority stake in Korea First Bank, then the country's worst-performing bank, and installed new management that streamlined operations and expanded profitable lines of business such as platinum credit cards for affluent customers. Now that the Seoul bank is comfortably in the black, with $235 million in profits last year, Texas Pacific is looking to replicate that success at Bankgesellschaft Berlin. It won't be easy. Berlin officials, fearful that restructuring could lead to job losses and a political backlash, now seem increasingly reluctant to sell it.

WEAK DEMAND. What's more, some Texas Pacific holdings are getting hammered in the current economic downturn. In January, 2000, Texas Pacific sank $500 million into Gemplus International (GEMP ), a French maker of microchip-embedded smart cards, in the biggest private-equity investment in Europe to date. When the company went public last year, Texas Pacific's 26% share was valued at more than $825 million. But since then, Gemplus has been battered by weak demand for its chief product, the "smart" chips used in mobile phones. Gemplus shares have plummeted 65% since the IPO.

Texas Pacific also faces a tough job at Bally, the Swiss leather-goods maker it acquired in August, 1999, for an undisclosed sum. Bonderman and his team installed a new creative team that restyled Bally's product line and spiffed up stores with clean Scandinavian styling. It slashed costs by closing more than 100 stores. The only problem: The global luxury-goods industry is headed into a steep downturn.

Certainly, Texas Pacific could still come out ahead on its troubled investments. Bonderman has described the group as a value investor that usually holds onto investments for at least five years before trying to cash out. For now, Bonderman and his team are clearly on the hunt. Their Newbridge Capital Group has held talks in recent weeks with Japan's No. 2 phone carrier, KDDI Corp., about a possible bid for KDDI's cell-phone unit, Tu-Ka. An even bigger deal could be cooking in the U.S., where Burger King Corp., a unit of British beverage giant Diageo PLC, is on the block for an estimated $2 billion to $3 billion. Burger King Chief Executive John H. Dasburg has confirmed he has talked with Texas Pacific about a possible buyout. Texas Pacific declines to comment. But for the deal-hungry Bonderman, a Whopper could be just the thing.

By Carol Matlack in Paris, with David Fairlamb in Frankfurt and Irene Kunii in Tokyo

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