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Formerly bankrupt companies become M&A targets

Date: Friday, September 2, 2011
Author: Caroline Humer and Jessica Hall, Reuters

Hundreds of businesses crawling out of bankruptcy in the hands of hedge funds and other financial owners are hanging the "for sale" sign on their doors.

Distressed debt investors such as Paulson & Co, Avenue Capital and Silver Point Capital that took control of bankrupt companies during the financial crisis are looking to cash in on their investments as the economy recovers.

As a result, once-bankrupt companies in sectors such as auto parts, media, chemicals and technology that ended up in the hands of hedge funds and buyout shops are expected to come to the market soon, bankers said.

"There are some great brand names that are being rehabilitated and re-purposed into healthier companies," said one investment banker, who declined to be named because he was not authorized to speak to the media. "There will be demand for them when they come off the shelf."

Some already are. Auto parts supplier Cooper Standard (COSH.OB), which came out of bankruptcy in May 2010 under the control of hedge funds including Silver Point and Oak Hill Advisors, is shopping itself.

Delphi Corp, with Silver Point and Elliott Management among its owners, is planning an initial public offering.

Others such as Dura Automotive, in which Patriarch Partners has a majority stake, and Lear Corp (LEA.N), owned partly by Goldman Sachs (GS.N), could hit the market in the next year or two, bankers said.

Paulson and Avenue declined to comment. Silver Point and the auto suppliers could not be reached for comment.


Media companies in a similar situation are likely to consolidate, and direct marketing companies in particular could be next, restructuring bankers said.

That includes Vertis Holdings, brought out of bankruptcy by GE Capital (GE.N) and Avenue, and Source Interlink, which emerged with JPMorgan Chase's (JPM.N) help.

Other media companies that came into financial ownership through bankruptcy include Charter Communications (CHTR.O), partly owned by Apollo Management (APO.N); RHI Entertainment, the Journal Register, Young Broadcasting, and ION Media Networks.

"Some of the now-bankrupt media companies still have broad customer bases and strong franchises," one of the bankers said. "Once that gets fixed and repackaged, these can be viable companies again."

Technology companies such as Satelites Mexicanos and MagnaChip Semiconductor Corp (MX.N) have also emerged from bankruptcy in hedge fund and investor hands in the past two years.

In the chemicals sector, companies such as Tronox Inc (TROX.PK) find themselves in a similar situation.

The companies could not be reached for comment.


Bankruptcy tends to be more of a playground for hedge funds than strategic buyers scouring for targets.

Most corporations interested in acquiring troubled companies prefer to wait until a bankruptcy is complete, said Barry Ridings, vice chairman of U.S. investment banking and co-head of restructuring at Lazard Ltd (LAZ.N).

Bankruptcy reorganizations might include closing unprofitable or nonstrategic divisions, shutting down plants and solving issues with unions or other workers, Ridings said.

Hedge fund owners can keep bankruptcy costs down as they push for quick changes and an exit, said David Resnick, chairman of the Global Financing Advisory group at Rothschild.

"They're measured by their return on their investment, so they are very sensitive to getting something done sooner rather than later," Resnick said.

It is not that strategics never buy these ugly ducklings. Investor Charles Ergen purchased three bankrupt companies for his Dish and Echostar Corp (SATS.O) businesses in 2011.

"There's value received if you are willing to enter a complex, contentious situation," Resnick said. "Some people say that the value they'd be getting just isn't worth it."