Two Buyout Firms Set to Triple Their Payout in a Rare Retail Win

  • CVC, Leonard Green stand to triple 2011 investment in BJ’s
  • $703 million payout pinned to forecast of rapid Ebitda growth

Two buyout firms are lining up to extract their biggest payout yet from BJ’s Wholesale Club Inc., potentially tripling what they put into the warehouse-style retailer in a 2011 buyout.

CVC Capital Partners and Leonard Green & Partners are counting on almost insatiable demand for leveraged loans to finance a $703 million dividend through a debt-funded deal, according to people with knowledge of the matter. The owners are banking on projections that promise a 14 percent jump in a measure of earnings from junk-rated BJ’s, said the people, who asked not to be identified because the discussions aren’t public.

If debt investors play along, it would mark the third dividend the two private equity firms have extracted from the membership-only chain, boosting total payouts to about $1.8 billion -- and they only put in a $630 million equity check when they bought BJ’s five years ago. That’s an especially rapid return at a time when retailers are struggling with fewer shoppers and more competitors, a combination that has driven other private equity led buyouts to the brink of failure.

The payday for CVC and Leonard Green would come at the cost of heaping additional debt onto BJ’s balance sheet, which will push a key measure of debt to earnings to almost eight times from 6.6 times, according to S&P Global Ratings. A misstep with that amount of leverage could hurt the company’s B-minus credit rating, which is already six levels below investment grade.

Running Room

"Private equity firms have their own investment objective and our rating reflects the leverage position," said Andy Sookram, an analyst at S&P. "But we think with profit growth we are expecting and the cash flow BJ’s generates, it gives them some room to delever."

Representatives for CVC, Leonard Green and BJ’s declined to comment.

One portion of the debt transaction in the market includes a $600 million second-lien loan that is already rated CCC, a level considered vulnerable to nonpayment and dependent on favorable economic conditions, according to S&P ratings definitions.

The other parts of the deal include a $1.85 billion first-lien loan and a $1 billion revolving facility, the people said. That total debt package will be used to pay down $2.1 billion of existing debt and the dividend payment. A portion of the shareholder distribution would be funded by the revolver, the people said.

Faster Growth

The private equity firms are emboldened to seek their biggest dividend yet because they’re telling lenders the company is set to deliver its best year of Ebitda growth since the purchase, pushing those earnings to $475 million for the financial year ending January 2017, the people said. Ebitda is an adjusted measure of profit that gauges a company’s ability to pay its debts.

Some investors are questioning whether that pace is sustainable, especially since BJ’s reported a 1.9 percent decline in same-store sales through mid-November.

Part of the Ebitda growth is being credited to aggressive efforts by Chief Executive Officer Chris Baldwin to reduce procurement and purchasing costs, according to one investor. Baldwin has led the company since February 2016, when he replaced long-time CEO Laura Sen.

Westborough, Massachusetts-based BJ’s is a membership-based warehouse club that sells brand-name and private-label food and general merchandise at low prices in the eastern U.S. Started in 1984, it operates 214 outlets in 15 states with more than 10 million members. Costco Wholesale Corp. and Wal-Mart Stores Inc.’s Sam’s Club are comparable, bigger chains with sales well in excess of the $12.3 billion BJ’s expects to post for its current financial year.

"The warehouse sector is pretty strong," S&P’s Sookram said. "Consumers are looking for value and the warehouse retail club has a compelling value to offer to customers."

— With assistance by Kiel Porter

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