Reporter's notebook: Apria Healthcare

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Monday, April 26, 2010

LAKE FOREST, Calif. – Do you know what a “dividend recapitalization” is? I didn’t, but I do now.

This issue comes up because recently I ran into news stories involving two industry companies: Apria Healthcare and Attends Healthcare, a maker of adult incontinence items. Apria, pending shareholders approval, has arranged a $500 million “dividend recap” and Attends $98 million.

Here’s what Investopedia, an online investing dictionary, says about dividend recaps:

When a company incurs a new debt in order to pay a special dividend to private investors or shareholders. This usually involves a company owned by a private investment firm, which can authorize a dividend recapitalization as an alternative to selling its equity stake in the company. The dividend recap has seen explosive growth, primarily as an avenue for private investment firms to recoup some or all of the money they used to purchase their stake in a business. It is generally not looked upon favorably by creditors or common shareholders because it reduces the credit quality of the company while only benefiting a select few.

Here’s another perspective that I pulled from a Dow Jones story:

Under this procedure, a buyout firm’s portfolio company takes on additional debt, which it then uses to pay its buyout sponsor a dividend. That allows the buyout firm to take some of the risk of its equity investment off the table, while still owning the company-a win-win situation if there ever was one.

If Apria’s $500 million dividend recap goes through, the Blackstone Group, which bought the company in 2008 for $1.6 billion, will recoup much of its $673 million equity investment.

The Attends dividend recap includes a $20 million asset-based revolving credit line, and $78 million in loans. The money will be used to refinance existing debt and fund a $60 million distribution to shareholders like the private-equity group KPS Capital Partners.

If I’m Blackstone or KPS, I’m saying to myself: What’s not to like? I get a good chunk of my equity investment back, but still get to own the company. I bet they take the money from their dividend recaps, invest it somewhere else, and make even more money.

To which I say: Nice work if you can get it.

 

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